PT - JOURNAL ARTICLE AU - Christophe Pérignon TI - Testing the Monotonicity Property of Option Prices AID - 10.3905/jod.2006.667551 DP - 2006 Nov 30 TA - The Journal of Derivatives PG - 61--76 VI - 14 IP - 2 4099 - https://pm-research.com/content/14/2/61.short 4100 - https://pm-research.com/content/14/2/61.full AB - One of the most basic properties of rational option pricing is that a rise in the price of the underlying increases the value of a call and decreases the value of a put. But results reported in the literature have found that for options on the S&P 500 Index this principle is violated in practice on the order of 10 percent of the time. Should we interpret this as evidence that the options market often ignores a fundamental principle of option valuation? Or that new option models are needed that would allow such seemingly anomalous behavior? In this article, Pérignon helps to resolve this issue using transactions-level data from five major index-options markets. He finds that wrong-way option price changes do occur in all of them a substantial fraction of the time. But looking for the explanation behind the numbers, he shows that market microstructure effects, like bid-ask bounce and rational tactics for trading in a market with a wide bid-ask spread, appear to account for much of the phenomenon.TOPICS: Options, security analysis and valuation