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The intraday determination of liquidity in the NYSE LIFFE equity option markets

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posted on 2023-06-09, 12:43 authored by Thanos Verousis, Owain ap Gwilym, Louisa ChenLouisa Chen
We exploit an extensive high-frequency data set of all individual equity options trading at New York Stock Exchange London International Financial Futures and Options Exchange (Amsterdam, London and Paris) in order to study the determination of liquidity during the trading day. In particular, we focus on two main aspects of option liquidity: (i) the intraday behaviour of equity option liquidity and its determinants and (ii) the influence of macroeconomic events and commonality on intraday equity option liquidity. Inventory management models cannot explain the intraday variation in option spreads and depths. Instead, we show that the option liquidity measures are strongly correlated with option volatility. Increases in volatility are associated with decreases in liquidity, a finding that is in line with information asymmetry models and the derivatives hedging theory. However, the relationship between spreads and volume varies across the three markets. Option liquidity reacts strongly to macroeconomic news announcements, especially US events. The average systematic liquidity component is 12% for Amsterdam, 14% for London and 16% for Paris.

History

Publication status

  • Published

File Version

  • Accepted version

Journal

The European Journal of Finance

ISSN

1351-847X

Publisher

Taylor & Francis

Issue

12

Volume

22

Page range

1164-1188

Department affiliated with

  • Business and Management Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2018-04-04

First Open Access (FOA) Date

2018-04-05

First Compliant Deposit (FCD) Date

2018-04-05

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