Abstract

The aim of this paper is to survey a wide range of empirical papers on option markets to address the extent to which option markets affect price discovery on the spot market. The theoretical prediction that informed traders should sometimes trade in the option market has been examined empirically by several authors. The existing empirical evidence for such a view, however, is mixed. One group of researchers support the hypothesis that information reflects in option market first and find a significant lead for the option market. Another group of researchers support the hypothesis that information reflects in stock markets first and trading activities in option markets are not significant. Since there is no consensus among the empirical studies on this issue, it leaves us with some open theoretical and empirical issues.

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