Price discovery of index options when futures are limit-locked Evidence from Taiwan

摘要

Brennan’s (1986) model suggests that price limit helps mitigate the default incentive on futures if information regarding the obscured price is not conveyed by relevant spot or option markets. This paper presents evidence for a strong information role of liquid index option during index futures limit-lock period in Taiwan. The implicit spot indexes recovered from the option premiums provided continuous, consistent and accurate price discovery of the unobserved equilibrium index. The options assumed a greater proportion of information contribution under extreme market condition, indicating the migration of price discovery from futures to options. Results imply that price?limits on index futures impair information efficiency but achieve little effect in controlling default risk.