The Information Content of Prices in Derivative Security Markets
IMF Working Papers, December 1, 1991
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- The Information Content of Prices in Derivative Security Markets
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Bibliographic details
- Authors: Louis O. Scott
- Published: December 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451932553.001
Overview and Purpose
- Prices in futures markets and option markets reflect expectations about future price movements in spot markets, but these prices can also be influenced by risk premia.
- Futures and forward prices are sometimes interpreted as market expectations for future spot prices, and option prices are used to calculate the market’s expectations for future volatility of spot prices.
- Purpose of the paper: to examine the information that is reflected in futures prices and option prices by reviewing both the relevant analytical models and the empirical evidence.
Main Themes Reviewed
- Analytical models that link futures, forward, and option prices to market expectations of future spot prices and volatility.
- Empirical evidence on whether futures and option prices accurately reflect market expectations versus being affected by risk premia.
Key Findings (as stated in summary)
- Futures and forward prices can reflect market expectations for future spot prices but may be influenced by risk premia.
- Option prices are used to calculate market expectations for future volatility of spot prices, but their informational content may also be affected by risk premia.
- The paper examines both theoretical frameworks and empirical studies to assess the extent to which derivative prices convey accurate information about expected future spot prices and volatility.
Subjects and Keywords
- Subject: Asset prices, Financial institutions, Futures, National accounts, Options, Prices, Return on investment, Stocks
- Keywords: Asset prices, CIR price futures, dividend yield, forward price, Futures, futures option, futures price, futures settlement price, interest rate, Options, Return on investment, risk premium, spot market, spot price, stock index, Stocks, term structure, Treasury bond futures, WP
Notes and Repository Information
- Also published in Staff Papers, Vol. 39, No. 3, September 1992.
- Available in IMF eLibrary (multiple formats).
- Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
Source: The Information Content of Prices in Derivative Security Markets, IMF Working Paper No. 1991/132