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calendar_month Publicación: 27/09/2022

Price impact versus bid–ask spreads in the index option market

Autor: Andreas Kaeck, Vincent Van Kervel, Norman Seeger

Profesor Relacionado: Vincent Van Kervel

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.

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