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Price impact versus bid-ask spreads in the index option market
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 SeegerWe 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
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- Published version
Journal
Journal of Financial MarketsISSN
1386-4181Publisher
ElsevierExternal DOI
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1-22Article number
a100675Department affiliated with
- Accounting and Finance Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2021-09-20First Open Access (FOA) Date
2021-10-13First Compliant Deposit (FCD) Date
2021-09-19Usage metrics
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