Does fundamental value run asset price formation process? Evidence from option price information content

Abstract

The theory of efficiency asserts that the existence of irrational investors does not affect market efficiency by supporting the fact that their mistakes will be exploited by arbitrageurs who bring prices to efficiency. The current paper seeks to find out whether fundamental value governs the process of financial asset price formation or else the perception and the convention made by the market about this value influences this process. We focus on the impact of heterogeneous traders’ beliefs and expectations on the quality of their anticipation and the manner it influences the process of asset price formation. By analyzing information content of options on the S&P TSX 60 Canadian index during January 1, 2012 to December 31, 2013, we validate that heterogeneity of traders’ expectations and switching affect the asset price formation process.