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What do Options have to do With It?: Inclusion of Options Market Indicators in Bid‐ask Spread Decomposition *
Author(s) -
Michayluk David,
Prather Laurie,
Woo LiAnne E.,
Yip Henry Y. K.
Publication year - 2009
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 1226-1165
DOI - 10.1111/j.2041-6156.2009.tb00020.x
Subject(s) - ask price , leverage (statistics) , bid price , econometrics , bid–ask spread , stock market , business , stock (firearms) , financial economics , economics , stock exchange , finance , statistics , mathematics , geography , context (archaeology) , archaeology
This paper develops a cross‐market model to extend Huang and Stoll (1997) by utilizing information from trade flows in the options market. Empirical tests reveal a significant increase in the estimated adverse information component, which stays consistent irrespective of the degree of option leverage. Further, intraday variation in stock bid‐ask spread components is affected by the stock trade size and the extent of imbalance in information‐based option trades. Including the options market information in decomposition of the stock bid‐ask spread enhances the quality of its estimation.