THE IMPACT OF LIQUIDITY ON OPTION PRICES

NCUIR > School of Management at National Central University > Department of Finance > journal & Dissertation > Item 987654321/51723

Please use this identifier to cite or link to this item: http://ir.lib.ncu.edu.tw/handle/987654321/51723

Title:	THE IMPACT OF LIQUIDITY ON OPTION PRICES
Authors:	Chou,RK;Chung,SL;Hsiao,YJ;Wang,YH
Contributors:	財務金融學系
Keywords:	INDIVIDUAL EQUITY OPTIONS;IMPLIED VOLATILITY;STOCK-RETURNS;MARKET;RISK;ILLIQUIDITY;DETERMINANTS;COMMONALITY;SPREAD;YIELDS
Date:	2011
Issue Date:	2012-03-27 19:03:36 (UTC+8)
Publisher:	國立中央大學
Abstract:	This study illustrates the impact of both spot and option liquidity levels on option prices. Using implied volatility to measure the option price structure, our empirical results reveal that even after controlling for the systematic risk of Duan and Wei (2009), a clear link remains between option prices and liquidity; with a reduction (increase) in spot (option) liquidity, there is a corresponding increase in the level of the implied volatility curve. The former is consistent with the explanation on hedging costs provided by Cetin, Jarrow, Protter, and Warachka (2006), whereas the latter is consistent with the "illiquidity premium" hypothesis of Amihud and Mendelson (1986a). This study also shows that the slope of the implied volatility curve can be partially explained by option liquidity. (C) 2011 Wiley Periodicals, Inc. Jrl Fut Mark 31: 1116-1141, 2011
Relation:	JOURNAL OF FUTURES MARKETS
Appears in Collections:	[Department of Finance] journal & Dissertation

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