Research paper by Matthew L.O'Connor, Quinipiac College published by The Financial Review in 1999 titled The Cross sectional relationship between trading costsand lead/lag effects in stock market

He cited about Roll's compound formula for finding the lead-lag effects between stocks and options. I have a similar data for National Stock Exchange's Index, NIFTY but it's daily, not intra-day. I could not understand what Roll, and Matthew did. If anyone could explain the inversion of this pricing formula, it'd be a huge help.

  • $\begingroup$ After mentioning that Stephan/Whaley and Diltz/Kim inverted the Roll formula, O'Connor says that "in this study" he did not do this (giving a reason) but instead he inverted the Binomial Option Pricing method with Dividend. So which method is your question asking about? The BOPM seems better since it correctly handles both the dividend and the American exercise, the Roll method only approximates the effect of the dividend. $\endgroup$
    – nbbo2
    Commented Jun 13, 2020 at 21:31
  • $\begingroup$ @noob2 I am asking about the BOPM model. I didn't get how the BOPM model was inverted. Please tell me how to proceed with it. $\endgroup$ Commented Jun 13, 2020 at 22:36
  • $\begingroup$ You have $\sigma,r,T,K,Div$ and the market prices $S_{MKT}$ and $O_{MKT}$ (the option). Initialize $S^*$ to $S_{MKT}$. Calculate the option price $O_{BOPM}$ from $S^*,\sigma,r,T,K,Div$, if it is equal to $O_{MKT}$ stop. If not, adjust $S^*$ up or down a little (based on Black Scholes Delta) and try again the BOPM calculation with this new implied stock price. $\endgroup$
    – nbbo2
    Commented Jun 14, 2020 at 7:55
  • $\begingroup$ @noob2 Could you please explain it with an example. I am a bit new to this. $\endgroup$ Commented Jun 17, 2020 at 21:35


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