Lead Lag Direction and Price Discovery of the S&P/ASX 200 Share Price Index and the S&P/ASX 200 Index Options

Abstract

We examined the lead-lag relationship between the S&P/ASX200 Share Price Index as the underlying security of the S&P/ASX 200 Index Options traded on the ASX. We investigated the information content of the index and option markets in the price discovery process. Based on conditional volatility models results, the long run equilibrium relationship between the share price index, the implied price of the share-price-index option was investigated. Causality was determined to show which market leads the other. Information share measures were used to gauge the contribution of the share price index and index option markets to the price discovery process. Unambiguous evidence shows the index market leads the option market and the former contributes more to price discovery than the latter.