Bid-Ask Spread and Liquidity Searching Behaviour of Informed Investors in Option Markets

16 Pages Posted: 27 Feb 2019

See all articles by Alejandro Bernales

Alejandro Bernales

Universidad de Chile

Carlos Cañón

Banco de México

Thanos Verousis

Essex Business School

Date Written: September 17, 2017

Abstract

We show evidence of a liquidity searching behaviour of informed investors in option listings, which was also found by Collin-Dufresne and Fos (2015) using stock markets. Nevertheless, and differently from Collin-Dufresne and Fos (2015), we find that the option bid-ask spread may be still a good proxy for informed trading, despite of the liquidity searching behaviour of informed agents. We show an upward trend in the option bid-ask spread after option introductions (as informed traders avoid trading in initial periods after listing dates due to the low liquidity environment), which is steeper for options with high chances of information asymmetries.

Keywords: stock options, option listings, informed trading

JEL Classification: D82, G10, G14.

Suggested Citation

Bernales, Alejandro and Cañón, Carlos and Verousis, Thanos, Bid-Ask Spread and Liquidity Searching Behaviour of Informed Investors in Option Markets (September 17, 2017). Available at SSRN: https://ssrn.com/abstract=3336264 or http://dx.doi.org/10.2139/ssrn.3336264

Alejandro Bernales (Contact Author)

Universidad de Chile ( email )

Diagonal Paraguay 257
Santiago
Chile

HOME PAGE: http://www.alejandrobernales.com

Carlos Cañón

Banco de México ( email )

Av. 5 de Mayo No. 6
Col. Centro, Deleg. Cuauhtémoc
Ciudad de México, DF, 06059
Mexico

Thanos Verousis

Essex Business School ( email )

United Kingdom

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