Cost Reduction, Informational Efficiency, and Prices of Options

56 Pages Posted: 19 Jul 2016 Last revised: 20 Apr 2018

See all articles by Sophie Xiaoyan Ni

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU)

Date Written: August 5, 2016

Abstract

This paper documents four findings in the option market based on two stages of decimalization where switching control and treatment stocks is possible. First, uninformed traders are more cost sensitive than informed traders. Second, the paper proves and verifies that when uninformed traders are more cost sensitive, trading cost reduction causes slower response of price to information. Those findings are contrary to the evidences in the stock market. Third, decimalization narrows bid ask spread, increases volume, and deepens depth, especially for options requiring frequent hedging re-balancing in the stock market. Finally, option prices become more expensive after decimalization.

Keywords: Derivatives, Options, Information Efficiency, Transaction Costs

Suggested Citation

Ni, Sophie Xiaoyan, Cost Reduction, Informational Efficiency, and Prices of Options (August 5, 2016). Available at SSRN: https://ssrn.com/abstract=2811017 or http://dx.doi.org/10.2139/ssrn.2811017

Sophie Xiaoyan Ni (Contact Author)

Hong Kong Baptist University (HKBU) ( email )

Kowloon
Hong Kong

HOME PAGE: http://sites.google.com/site/sophiexni/

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