Price impact versus bid-ask spreads in the index option market : Sussex Research Online

Tools

Kaeck, Andreas, van Kervel, Vincent and Seeger, Norman J (2021) Price impact versus bid-ask spreads in the index option market. Journal of Financial Markets. a100675 1-22. ISSN 1386-4181

	PDF - Accepted Version Download (668kB)
	PDF - Published Version Available under License Creative Commons Attribution. Download (902kB)

Official URL: https://doi.org/10.1016/j.finmar.2021.100675

Abstract

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 ﬂows across contracts after a decomposition into exposure to the underlying asset and its volatility. While our estimates conﬁrm that S&P500 option trades indeed signiﬁcantly move the underlying and the volatility, the economic magnitudes are very small. Hence, large bid-ask spreads of options remain a puzzle.

Item Type:	Article
Schools and Departments:	University of Sussex Business School > Accounting and Finance
SWORD Depositor:	Mx Elements Account
Depositing User:	Mx Elements Account
Date Deposited:	20 Sep 2021 07:30
Last Modified:	13 Oct 2021 09:45
URI:	http://sro.sussex.ac.uk/id/eprint/101777

View download statistics for this item

📧 Request an update