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Price impact versus bid-ask spreads in the index option market

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Version 2 2023-06-12, 08:06
Version 1 2023-06-10, 01:02
journal contribution
posted on 2023-06-12, 08:06 authored by Andreas KaeckAndreas Kaeck, Vincent van Kervel, Norman J Seeger
We investigate the puzzle of why bid-ask spreads of options are so large by focussing on the price impact component of the spread. We propose a structural vector autoregressive model for trades in the option market to analyze whether they move the underlying price and/or the underlying’s volatility. Our model captures cross-option strategies by pooling order ?ows across contracts after a decomposition into exposure to the underlying asset and its volatility. While our estimates con?rm that S&P500 option trades indeed signi?cantly move the underlying and the volatility, the economic magnitudes are very small. Hence, large bid-ask spreads of options remain a puzzle.

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Publication status

  • Published

File Version

  • Published version

Journal

Journal of Financial Markets

ISSN

1386-4181

Publisher

Elsevier

Page range

1-22

Article number

a100675

Department affiliated with

  • Accounting and Finance Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2021-09-20

First Open Access (FOA) Date

2021-10-13

First Compliant Deposit (FCD) Date

2021-09-19

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