Abstract

Do DAX Options and the DAX Move in Opposite Directions ?

Claus Lucke und Ralf Herrmann

Universität Karlsruhe

Most option pricing models predict that an increase in the underlying asset leads to an increase (decrease) in the price of a call (put) on this asset. Using intraday data, we investigate whether this is true for calls and puts on the DAX. Like in Bakshi/Cao/Chen (1998), we identify several empirical violations of these predictions implying that these option pricing models are not consistent with empirically observed option prices on an intraday basis. The occurence of these violations also has important implications for risk management as they imply that the hedging strategy derived from these option pricing models will not eliminate the risk. We also examine whether DAX calls and DAX puts with otherwise identical contract specifications move in the same direction.