Does Adverse Selection Affect Bid-Ask Spreads for Options‘

@article{Bartram2007DoesAS,
  title={Does Adverse Selection Affect Bid-Ask Spreads for Options‘},
  author={S{\"o}hnke M. Bartram and Frank Fehle and David G. Shrider},
  journal={Organizations \& Markets eJournal},
  year={2007}
}
This study examines two different option markets to test whether differences in the level of adverse selection faced by market makers affect the size of bid–ask spreads. The data are from bank‐issued options that trade on EuWax, where market makers face little adverse selection and traditional options that trade on EuRex. The results support the hypothesis that the adverse selection component of the bid–ask spread is important, as options on EuWax have lower bid–ask spreads than comparable… 

The Impact of Off-Market Trading on Liquidity: Evidence from the Australian Options Market

This study investigates the impact of reducing the contract size threshold for off‐market trading on transaction costs in an options market. This study provides evidence that market makers compete

Do Option Strategy Traders Have a Disadvantage? Evidence from the Australian Options Market

This study measures the magnitude of execution costs of outright options and options which constitute strategies (“strategy‐linked options”), and examines if any differences in execution costs

Dark Trading Regulations and Options Market Liquidity: Evidence from the Canadian Market

This study investigates the impact of dark equity trading regulatory restrictions on the options market liquidity in Canada. In late 2012, the Canadian market regulator introduced a new dark trading

The Effects of Information Asymmetries on the Ex-Post Success of Stock Option Listings

We examine a number of unexplored factors that affect the ex-post adoption rates of newly listed stock options. We show that a variety of measures of information asymmetries for underlying stocks

Covered Warrant Valuation: A Costly Hedging Model

We provide a new, supply-side explanation for the consistent, statistically significant, empirical observation that covered warrant prices are higher than those of corresponding traded options.

Essays on Option Markets: Empirical and Theoretical Learning Models

This thesis consists of three essays. The first two essays present empirical studies in which option market features related to information flows are examined. The third essay introduces a

Volatility Discovery and Volatility Quoting on Markets for Options and Warrants

In several countries, classical options markets coexist with markets for bank-issued options, also termed warrants. It is an open question if warrant issuers purely adopt options market information

The Demand for Warrants and Issuer Pricing Strategies

We develop a model for the demand of warrants by individual investors with regard to their sensitivity to issuer margins, defined as the relative overpricing with respect to the theoretical value.

Two Essays in Empirical Asset Pricing

This thesis includes two research papers in the area of empirical asset pricing. In the first research paper titled “Option implied moments and risk aversion”, under reasonable assumptions, I provide

References

SHOWING 1-10 OF 13 REFERENCES

Option Bid-Ask Spread and Scalping Risk: Evidence from a Covered Warrants Market

This study develops and empirically tests a simple market microstructure model to capture the main determinants of option bid-ask spread. The model is based on option market making costs (initial

Liquidity of the CBOE Equity Options

The author examines the CBOE option market depth and bid-ask spreads. Absence of price effects surrounding large option trades suggests excellent market depth. However, bid-ask spreads for the CBOE

Modeling the Impacts of Market Activity on Bid-Ask Spreads in the Option Market

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

Information Effects on the Bid‐Ask Spread

An individual who chooses to serve as a market-maker is assumed to optimize his position by setting a bid-ask spread which maximizes the difference between expected revenues received from

Option Volume and Stock Prices: Evidence on Where Informed Traders Trade

This paper investigates the informational role of transactions volume in options markets. We develop an asymmetric information model in which informed traders may trade in option or equity markets.

Informational Content of Option Volume Prior to Takeovers

This paper examines the information embedded in both the stock and option markets prior to takeover announcements. During normal periods, buyer-seller initiated stock volume imbalances are

Life in the Pits: Competitive Market Making and Inventory Control

We use futures transaction data to investigate cross-sectional relationships between market-maker inventory positions and trade activity. The investigation documents strongly that traders control

A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity

This paper presents a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic. This estimator does not depend on a formal

The only game in town

Continuous Auctions and Insider Trading

A dynamic model of insider trading with sequential auctions, structured to resemble a sequential equilibrium, is used to examine the informational content of prices, the liquidity characteristics of