Bid–ask spread and liquidity searching behaviour of informed investors in option markets

Informed Trading in Stock and Option Markets

We investigate the contribution of option markets to price discovery, using a modification of Hasbrouck’s (1995) “information share” approach. Based on five years of stock and options data for 60 firms, we estimate the option market’s contribution to price discovery to be about 17% on average. Option market price discovery is related to trading volume and spreads in both markets, and stock vola...

Fractal markets: Liquidity and investors on different time horizons

In this paper, we propose a new agent-based model to study the source of liquidity and the ‘‘emergent’’ phenomenon in financial market with fractal structure. Themodel rests on fractal market hypothesis and agents with different time horizons of investments. What is interesting is that though the agent-based model reveals that the interaction between these heterogeneous agents affects the stabi...

Option hedging for small investors under liquidity costs

Following the framework of Çetin, Jarrow and Protter [4] we study the problem of super-replication in presence of liquidity costs under additional restrictions on the gamma of the hedging strategies in a generalized Black-Scholes economy. We find that the minimal super-replication price is different from the one suggested by the Black-Scholes formula and is the unique viscosity solution of the ...

Numerical analysis for Spread option pricing model of markets with finite liquidity: first-order feedback model

Liquidity Effects and Volatility Smiles in Interest Rate Option Markets

We investigate the interaction of volatility smiles and liquidity in the euro (€) interest rate option markets, using an extensive data-set on daily bid and ask prices of interest rate caps and floors. We find that, in this market, the implied volatility smiles are asymmetric, and are steeper on the ask-side. Liquidity variables have significant explanatory power for both curvature and asymmetr...