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Information Asymmetry Bid Ask Spreads And Option Returns
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Book Synopsis Information Asymmetry, Bid-Ask Spreads and Option Returns by : Fredrik Berchtold
Download or read book Information Asymmetry, Bid-Ask Spreads and Option Returns written by Fredrik Berchtold and published by . This book was released on 2003 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study analyses the information asymmetry at the stock market considering two different types of information flow. The first type represents changes in information where informed traders know if the stock price will increase or decrease. The second type is less specific - the direction is unknown, but informed traders know that the stock price either will increase or decrease. The different flows of information are estimated within a GARCH framework, using shocks in Swedish OMX-index returns and index option strangle returns respectively. The results show significant conditional variance in index returns and options strangle returns, although with notable differences. The index returns exhibit a high level of variance persistence, and an asymmetric initial impact of return shocks to variance (leverage effect). The strangle returns have a relatively low variance persistence, but a higher (and more symmetric) initial impact of return shocks. A time series regression of call and put option bid-ask spreads is performed, relating spreads to these two types of information, as well as other explanatory variables. The results show that option spreads are related to shocks in index and options strangle returns, as well as the conditional variance of the stock returns. Hence, market makers appear to alter option bid-ask spreads primarily in response to unexpected shocks in stock and strangle returns - and to changes in the expected variance level of stock returns.
Book Synopsis Modeling the Impacts of Market Activity on Bid-ask Spreads in the Option Market by : Young-Hye Cho
Download or read book Modeling the Impacts of Market Activity on Bid-ask Spreads in the Option Market written by Young-Hye Cho and published by . This book was released on 1999 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we examine the impact of market activity on the percentage bid-ask spreads of S & P 100 index options using transactions data. We propose a new market microstructure theory which we call derivative hedge theory, in which option market percentage spreads will be inversely related to the option market maker's ability to hedge his positions in the underlying market, as measured by the liquidity of the latter market. In a perfect hedge world, spreads arise from the illiquidity of the underlying market, rather than from inventory risk or informed trading in the option market itself. We find option market volume is not a significant determinant of option market spreads. This finding leads us to question the use of volume as a measure of liquidity and supports the derivative hedge theory. Option market spreads are positively related to spreads in the underlying market, again supporting our theory. However, option market duration does affect option market spreads, with very slow and very fast option markets both leading to bigger spreads. The fast market result would be predicted by the asymmetric information theory. Inventory model predicts big spreads in slow markets. Neither result would be observed if the underlying securities market provided a perfect hedge. We interpret these mixed results as meaning that the option market maker is able to only imperfectly hedge his positions in the underlying securities market. Our result of insignificant options volume casts doubt on the price discovery argument between stock and option market (Easley, O'Hara, and Srinivas (1998)). Asymmetric information costs in either market are naturally passed to the other market maker's hedgeing and therefore it is unimportant where the informed traders trade.
Book Synopsis Information Asymmetry Effect and FX Options Bid-Ask Spreads by : Alfred H.S. Wong
Download or read book Information Asymmetry Effect and FX Options Bid-Ask Spreads written by Alfred H.S. Wong and published by . This book was released on 2018 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the information asymmetry effect on bid-ask spreads of dollar-euro currency options traded in over-the-counter market. We use a composite indicator of systemic stress (CISS) as a proxy for the information asymmetry effect and find that the impact of CISS on bid-ask spread is positive and significant during volatile periods when traders are asymmetrically informed. Further, for options with maturities of less than six months, we also find a positive significant relationship between bid-ask spreads and the ECB's monetary policy announcements, suggesting informed option trading before, during and after such announcements. For longer-dated options, our result suggests that the information asymmetry effect is less pronounced in the bid-ask spreads. These results are confirmed using the Glosten and Milgrom (1985) model.
Book Synopsis The nature of informed option trading: Evidence from the takeover market by : Marco Klapper
Download or read book The nature of informed option trading: Evidence from the takeover market written by Marco Klapper and published by Anchor Academic Publishing (aap_verlag). This book was released on 2014-02-01 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines the kind of information ‘informed’ traders have prior to a takeover announcement using options of target firms and elaborates on the cross-sectional relationship between options and stocks around takeover announcements. Financial markets are driven by information and by individuals that generate, process, and disclose this information to the market. Naturally, there have to be individuals who possess more information about a firm or a future event than other market participants. Mergers and acquisitions are particularly interesting events in this regard because they can have significant implications for the firms and stakeholders involved, as well as for the competitive dynamics in the respective market. Because of the large potential price impact of such transactions, traders with private information about a prospective takeover are expected to trade on this information to make a profit. But who are these ‘informed traders’ and what kind of information do they possess? This study tries to give a respond to this question.
Book Synopsis The Intraday Behavior of Bid-Ask Spreads, Returns, and Volatility for Ftse-100 Stock Index Options by : Owain Ap Gwilym
Download or read book The Intraday Behavior of Bid-Ask Spreads, Returns, and Volatility for Ftse-100 Stock Index Options written by Owain Ap Gwilym and published by . This book was released on 1997 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The microstructure of stock markets and futures markets has attracted considerable recent attention, but the evidence relating to options markets is sparse, especially for the U.K. This article addresses this void in the literature by presenting evidence on the intraday behavior of bid-ask spreads, returns, volatility, and volume. Both clear differences and similarities are found with the previous results for other markets. Spreads are found to be wide near the market open and narrow near the close. Although this contrasts with some previous evidence in U.S. stock and futures markets of a U-shaped pattern in intraday spreads, it is consistent with other recent research, and the differences may be explained by differing market structures. No clear pattern emerges in options returns, but there is a U-shape across the day in returns volatility and in volume. The results help to differentiate between the competing theories of the intraday behavior of these key variables.
Book Synopsis Information Flows and Option Bid-Ask Spreads by : Lars L. Norden
Download or read book Information Flows and Option Bid-Ask Spreads written by Lars L. Norden and published by . This book was released on 2006 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study analyses two types of information flows in financial markets. The first type represents return information, where informed investors know whether the stock price will increase or decrease. The second type is labelled volatility information, where the direction of the stock price is unknown, but informed investors know that the stock price either will increase or decrease. Both information flows are estimated within the GARCH framework, approximated using Swedish OMX stock index and options strangle return shocks respectively. The results show significant conditional stock index and options strangle variance, although with notable differences. Stock index return shocks exhibit a high level of variance persistence and an asymmetric initial impact to the variance. Option strangle shocks have a relatively low persistence level, but a higher and more symmetric initial impact. A time series regression of call and put option bid-ask spreads is performed, relating the spreads to the information flows and other explanatory variables. The results show that call and put option bid-ask spreads are related to stock index and options strangle return shocks, as well as the conditional stock index variance. This is consistent with the view that market makers alter option spreads in response to return and volatility information flows, as well as the conditional stock index variance.
Book Synopsis Vertical Option Spreads, + Website by : Charles Conrick, IV
Download or read book Vertical Option Spreads, + Website written by Charles Conrick, IV and published by John Wiley & Sons. This book was released on 2013-09-03 with total page 256 pages. Available in PDF, EPUB and Kindle. Book excerpt: Make trades on vertical options spreads with the precision of a laser beam Vertical Options Spreads is a combination of a bona-fide academic research-based study and a complete method to trade credit and debit spreads, along with other complex option combination trades such as iron condors and butterflies. Here, the author has accumulated five years of daily data on the ETF, SPY and provided historical evidence of actual win rates at specific multiples of entry points, both in time and price level. For example, traders will be able to use the weekly options, pick a level of risk and return desired, learn how to place the trade, and then discover the actual percent return that the trade would have yielded. This must-have resource includes the basics of option trading and contains references to many excellent works by other authors that explore more about the intricacies of option mechanics and trading. It is far more than an analysis of one specific asset, SPY, featuring a study of probability theory and how it has applied to trading over the past five years, including the highly volatile 2007 to 2009 time frame and the more "normal" 2010 to 2012 time period. The book offer a thorough understanding of how price movement, actual volatility, and implied volatility all provide a complex but workable web in which the informed trader can generate excellent returns. However, the trader must have the discipline to act within the confines of probability and the "law" of large numbers refusing to place trades based on gut feelings or hunches. Offers high-probability based trading that uses the new weekly options Contains handy interactive worksheets that allow traders to select their own risk/return with precision Includes a website with daily and weekly information on the estimate of the actual standard deviation points on the price spectrum Vertical Options Spreads offers traders a research-based guide for trading Standard & Poors 500 ETF, SPY using historic and estimated probabilities and returns that will give them an edge in the marketplace.
Book Synopsis Modeling the Impacts of Market Activity on Bid-Ask Spreads in the Option Market by : Young-Hye Cho
Download or read book Modeling the Impacts of Market Activity on Bid-Ask Spreads in the Option Market written by Young-Hye Cho and published by . This book was released on 2010 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we examine the impact of market activity on the percentage bid-ask spreads of Samp;P 100 index options using transactions data. We propose a new market microstructure theory which we call derivative hedge theory, in which option market percentage spreads will be inversely related to the option market maker's ability to hedge his positions in the underlying market, as measured by the liquidity of the latter market. In a perfect hedge world, spreads arise from the illiquidity of the underlying market, rather than from inventory risk or informed trading in the option market itself. We find option market volume is not a significant determinant of option market spreads. This finding leads us to question the use of volume as a measure of liquidity and supports the derivative hedge theory. Option market spreads are positively related to spreads in the underlying market, again supporting our theory. However, option market duration does affect option market spreads, with very slow and very fast option markets both leading to bigger spreads. The fast market result would be predicted by the asymmetric information theory. Inventory model predicts big spreads in slow markets. Neither result would be observed if the underlying securities market provided a perfect hedge. We interpret these mixed results as meaning that the option market maker is able to only imperfectly hedge his positions in the underlying securities market. Our result of insignificant options volume casts doubt on the price discovery argument between stock and option market (Easley, O'Hara, and Srinivas (1998)). Asymmetric information costs in either market are naturally passed to the other market maker's hedgeing and therefore it is unimportant where the informed traders trade.
Book Synopsis Asymmetric Option Price Distribution and Bid-Ask Quotes by : Lars L. Norden
Download or read book Asymmetric Option Price Distribution and Bid-Ask Quotes written by Lars L. Norden and published by . This book was released on 2002 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study presents a model, which can be used to estimate the asymmetry of option values with respect to option bid-ask spreads. The model provides an extension to the model in Chan and Chung (1999), since it does not require knowledge of the actual option value to evaluate the asymmetry. Using data from the Swedish market for equity options, results show clear evidence of asymmetry in call and put option values, where the option values tend to be closer to bid than to ask quotes. Significant differences are found with respect to option moneyness; in- and out-of-the-money calls and puts show a higher degree of asymmetry than options which are close to at-the-money. These results imply that representing an option value with the bid-ask midpoint results in a bias, overestimating the value. The possible linkage between the asymmetry at the options markets and the so-called volatility smile is recognised. The estimated asymmetry parameters for call and put option values are used in an out-of-sample analysis of option-implied volatility. Comparisons are made with the benchmark case under the assumption of no asymmetry in option values, i.e. when the bid-ask midpoints are used in the estimation of implied volatility. When the implied volatilities are adjusted for asymmetry effects, there is considerably less evidence of a smile, relative to the benchmark case. This study is believed to be the first to account for asymmetry effects in option values when calculating implied volatility.
Book Synopsis Using S&P 500 Companies to Examine the Impact of Fair Value Option on Information Asymmetry- Using Bid-ask Spread, Share Turnover and Return Volatility by : 黃薇涵
Download or read book Using S&P 500 Companies to Examine the Impact of Fair Value Option on Information Asymmetry- Using Bid-ask Spread, Share Turnover and Return Volatility written by 黃薇涵 and published by . This book was released on 2009 with total page 124 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Market Illiquidity and the Bid-Ask Spread of Derivatives by : Joao Amaro de Matos
Download or read book Market Illiquidity and the Bid-Ask Spread of Derivatives written by Joao Amaro de Matos and published by . This book was released on 2006 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the impact of illiquidity of a stock on the pricing of derivatives. In particular, it is shown how illiquidity generates a bid-ask spread in an option on this stock, even in the absence of other imperfections, such as transaction costs and asymmetry of information. Moreover, the spread is shown to be asymmetric with respect to the option price under perfect liquidity. This fact explains the appearance of a smile ecurren;ect when the implied volatility is estimated from the mid-quote.
Book Synopsis Market Making with Asymmetric Information and Inventory Risk by : Hong Liu
Download or read book Market Making with Asymmetric Information and Inventory Risk written by Hong Liu and published by . This book was released on 2017 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: Market makers in some financial markets often make offsetting trades and have significant market power. We develop a market making model that captures these market features as well as other important characteristics such as information asymmetry and inventory risk. In contrast to the existing literature, a market maker in our model can optimally shift some trades with some investors to other investors by adjusting bid or ask. As a result, we find that consistent with empirical evidence, expected bid-ask spreads may decrease with information asymmetry and bid-ask spreads can be positively correlated with trading volume.
Book Synopsis Is Reversal of Large Stock-Price Declines Caused by Overreaction or Information Asymmetry by : Hyung-Suk Choi
Download or read book Is Reversal of Large Stock-Price Declines Caused by Overreaction or Information Asymmetry written by Hyung-Suk Choi and published by . This book was released on 2015 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We reexamine the role of option markets in the reversal process of stock prices following stock price declines of 10 percent or more. We randomly select a matched-pair of optionable and non-optionable firms when their price declines of 10 percent or more on the same date. We examine the 1,443 and 1,018 matched-pairs of NYSE/AMEX and NASDAQ firms over the period from 1996 to 2004. We find that the positive rebounds for non-optionable firms are caused by an abnormal increase in bid-ask spread on and before the large price decline date. On the other hand, the bid-ask spreads for optionable firms decrease on and before the large price decline date. We also find an abnormal increase in open interest and volume in the option market on and before the large price decline date. Overall, our results suggest that the stock price reversal is not a result of overreaction, nor can it be simply explained by bid-ask bounce.
Book Synopsis Information Asymmetry, Price Changes, Trading Volume and Bid-ask Spreads by : Vijay Kumar Chopra
Download or read book Information Asymmetry, Price Changes, Trading Volume and Bid-ask Spreads written by Vijay Kumar Chopra and published by . This book was released on 1990 with total page 318 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Trades, Quotes and Prices by : Jean-Philippe Bouchaud
Download or read book Trades, Quotes and Prices written by Jean-Philippe Bouchaud and published by Cambridge University Press. This book was released on 2018-03-22 with total page 464 pages. Available in PDF, EPUB and Kindle. Book excerpt: The widespread availability of high-quality, high-frequency data has revolutionised the study of financial markets. By describing not only asset prices, but also market participants' actions and interactions, this wealth of information offers a new window into the inner workings of the financial ecosystem. In this original text, the authors discuss empirical facts of financial markets and introduce a wide range of models, from the micro-scale mechanics of individual order arrivals to the emergent, macro-scale issues of market stability. Throughout this journey, data is king. All discussions are firmly rooted in the empirical behaviour of real stocks, and all models are calibrated and evaluated using recent data from Nasdaq. By confronting theory with empirical facts, this book for practitioners, researchers and advanced students provides a fresh, new, and often surprising perspective on topics as diverse as optimal trading, price impact, the fragile nature of liquidity, and even the reasons why people trade at all.
Book Synopsis Market Liquidity by : Thierry Foucault
Download or read book Market Liquidity written by Thierry Foucault and published by Oxford University Press. This book was released on 2023 with total page 531 pages. Available in PDF, EPUB and Kindle. Book excerpt: "The process by which securities are traded is very different from the idealized picture of a frictionless and self-equilibrating market offered by the typical finance textbook. This book offers a more accurate and authoritative take on this process. The book starts from the assumption that not everyone is present at all times simultaneously on the market, and that participants have quite diverse information about the security's fundamentals. As a result, the order flow is a complex mix of information and noise, and a consensus price only emerges gradually over time as the trading process evolves and the participants interpret the actions of other traders. Thus, a security's actual transaction price may deviate from its fundamental value, as it would be assessed by a fully informed set of investors. The book takes these deviations seriously, and explains why and how they emerge in the trading process and are eventually eliminated. The authors draw on a vast body of theoretical insights and empirical findings on security price formation that have come to form a well-defined field within financial economics known as "market microstructure." Focusing on liquidity and price discovery, the book analyzes the tension between the two, pointing out that when price-relevant information reaches the market through trading pressure rather than through a public announcement, liquidity may suffer. It also confronts many striking phenomena in securities markets and uses the analytical tools and empirical methods of market microstructure to understand them. These include issues such as why liquidity changes over time and differs across securities, why large trades move prices up or down, and why these price changes are subsequently reversed, and why we observe temporary deviations from asset fair values"--
Book Synopsis Bid-ask Spreads and Asymmetry of Option Prices by : Raisa Beygelman
Download or read book Bid-ask Spreads and Asymmetry of Option Prices written by Raisa Beygelman and published by . This book was released on 2008 with total page 118 pages. Available in PDF, EPUB and Kindle. Book excerpt:
