The Relationship Between Stock and Option Price Changes

This paper documents an important step in reconciling conflicting results by Manaster and Rendleman 16] and Stephan and Whaley 21] regarding price change relationships between options and their underlying stocks. Using recent advances in bi-directional causality testing and data sources available only fairly recently, statistical tests are conducted that mitigate the nonsynchroneity and bid-ask bias problems that may have affected the Manaster and Rendleman 16] study. Even with these adjustments, empirical results are consistent with Manaster and Rendleman 16], indicating that stock price changes adjust to lagged option price changes over two trading days. Moreover, results suggest that the causality is bi-directional.