Abstract

http://ssrn.com/abstract=1784868
 
 

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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

March 15, 2012


Abstract:     
Illiquidity is well-known to be a significant determinant of stock and bond returns. We report on illiquidity premia in the equity options market. An increase in option illiquidity decreases the current option price and implies higher expected option returns. This effect is statistically and economically signifi…cant. It is robust across different empirical approaches and when including various control variables. The illiquidity of the underlying stock affects the option return negatively, consistent with a hedging argument: When stock market illiquidity increases, the cost of replicating the option goes up, which increases the option price and reduces its expected return.

Number of Pages in PDF File: 47

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

JEL Classification: G12

working papers series


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Date posted: March 15, 2011 ; Last revised: March 16, 2012

Suggested Citation

Christoffersen, Peter and Goyenko, Ruslan and Jacobs, Kris and Karoui, Mehdi, Illiquidity Premia in the Equity Options Market (March 15, 2012). 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
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