TY - JOUR T1 - Directional Trading across Stock Limit Order Book and Options Markets JF - The Journal of Derivatives SP - 88 LP - 97 DO - 10.3905/jod.2016.24.2.088 VL - 24 IS - 2 AU - Qin Wang Y1 - 2016/11/30 UR - https://pm-research.com/content/24/2/88.abstract N2 - A perennial question about derivatives trading is whether “causality,” meaning price changes due to new information flowing into the market, run primarily from the underlying to the derivatives market or from the derivatives to the underlying. The typical methodology in addressing this issue is to test whether price changes in one market “Granger cause” a response in the other market. In this article, Wang brings in a new measure to explore causality between a stock and its options. He looks at whether “aggressiveness” in the placement of orders in the stock limit order book leads to aggressive trades in the options market (at prices inside the bid–ask spread but close to one end), or vice versa. It is of interest and some importance that causality is found to run in both directions. The degree of the effect is found to vary according to the time of day, the width of bid–ask spreads, and option moneyness.TOPICS: Derivatives, statistical methods ER -