Abstract–Volume and Efficiency of Speculative Markets

Extract

A major benefit of efficient markets is that observed market prices can be assumed to provide an accurate reflection of underlying intrinsic values. For a market to be efficient, however, sufficient numbers of market participants must engage in trading activity to ensure that observed prices are representative of the true but unobserved equilibrium price. Even though the pricing mechanism may impound the effect of all available information, the market price may be biased from the equilibrium price if the market is thin. This paper uses the price behavior of standardized call options traded on the Chicago Board Options Exchange to examine the relation between volume and inside efficiency.