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Price Clustering in Individual Equity Options: Moneyness, Maturity, and Price Level
Author(s) -
Gwilym Owain ap,
Verousis Thanos
Publication year - 2013
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21547
Subject(s) - moneyness , economics , price discovery , cluster analysis , equity (law) , econometrics , maturity (psychological) , financial economics , futures contract , mathematics , statistics , psychology , political science , law , developmental psychology
Equity options have a significant influence on the price discovery process. This study presents unique evidence of substantial price clustering in individual equity options contracts. A particular contribution arises from investigating competing hypotheses on the roles of moneyness and maturity as determinants of option price clustering. We assert that options price clustering can be decomposed to price level, moneyness, and maturity effects. After controlling for other factors, price clustering has an inverse relation with time‐to‐maturity. This supports the negotiation hypothesis, but not the price resolution hypothesis. Price clustering also tends to be inversely related to moneyness. This effect is linked to the intrinsic value component of option price. Both the maturity and moneyness effects act in an opposite direction to what would be anticipated on the basis of price level alone; hence, these two effects are identified as additional influences on option price clustering. It is also found that the designated market maker scheme at NYSE E uronext L ondon I nternational F inancial F utures E xchange ( LIFFE ) has little influence on trade price clustering. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:55–76, 2013