Abstract

http://ssrn.com/abstract=1784868
 
 

References (65)



 
 

Citations (5)



 


 



Illiquidity Premia in the Equity Options Market


Peter Christoffersen


University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Ruslan Goyenko


McGill University - Desautels Faculty of Management

Kris Jacobs


University of Houston - C.T. Bauer College of Business

Mehdi Karoui


McGill University

July 4, 2014


Abstract:     
Illiquidity is well-known to be a significant determinant of stock and bond returns. We are the first to estimate illiquidity premia in equity option markets using effective spreads for a large cross-section of firms. The risk-adjusted return spread for illiquid over liquid options is 23 bps per day for calls. The spread for puts is somewhat lower but still significant at 13 bps per day. The spread is generally largest for out-of-the money options. The illiquidity premium is robust to different empirical implementations. It is also robust when controlling for various firm-specific variables, including standard measures of illiquidity of the underlying stock, determinants of spreads, and a measure of net demand pressure. The positive illiquidity premium we find is consistent with existing evidence that market makers in the equity options market hold net long positions.

Number of Pages in PDF File: 59

Keywords: illiquidity, equity options, cross-section, option returns, option smile

JEL Classification: G12

working papers series


Download This Paper

Date posted: March 15, 2011 ; Last revised: July 5, 2014

Suggested Citation

Christoffersen, Peter and Goyenko, Ruslan and Jacobs, Kris and Karoui, Mehdi, Illiquidity Premia in the Equity Options Market (July 4, 2014). Available at SSRN: http://ssrn.com/abstract=1784868 or http://dx.doi.org/10.2139/ssrn.1784868

Contact Information

Peter Christoffersen
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)
HOME PAGE: http://www.christoffersen.com
Copenhagen Business School
Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
University of Aarhus - CREATES
School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark
Ruslan Goyenko (Contact Author)
McGill University - Desautels Faculty of Management ( email )
1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
Kris Jacobs
University of Houston - C.T. Bauer College of Business ( email )
Houston, TX 77204-6021
United States
Mehdi Karoui
McGill University ( email )
1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada
Feedback to SSRN


Paper statistics
Abstract Views: 2,057
Downloads: 467
Download Rank: 33,183
References:  65
Citations:  5

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.313 seconds