Zeros

22 Pages Posted: 2 Jan 2020

See all articles by Federico M. Bandi

Federico M. Bandi

Johns Hopkins University - Carey Business School

Aleksey Kolokolov

University of Manchester - Manchester Business School

Davide Pirino

Department of Economics and Finance, University of Rome "Tor Vergata"

Roberto Renò

University of Verona - Department of Economics

Date Written: December 10, 2019

Abstract

Asset prices can be stale. We define price “staleness” as lack of price adjustments yielding zero returns (i.e., zeros). The term “idleness” (resp. “near idleness”) is, instead, used to define staleness when trading activity is absent (resp. close to absent). Using statistical and pricing metrics, we show that zeros are a genuine economic phenomenon linked to the dynamics of trading volume and, therefore, liquidity. Zeros are, in general, not the result of institutional features, like price discreteness. In essence, spells of idleness or near idleness are stylized facts suggestive of a key, omitted market friction in the modeling of asset prices. We illustrate how accounting for this friction may generate sizable risk compensations in short-dated option returns.

Keywords: Volume, Liquidity, Short-Term Options

JEL Classification: G1, G12, G13, C58

Suggested Citation

Bandi, Federico Maria and Kolokolov, Aleksey and Pirino, Davide and Renò, Roberto, Zeros (December 10, 2019). Available at SSRN: https://ssrn.com/abstract=3501679 or http://dx.doi.org/10.2139/ssrn.3501679

Federico Maria Bandi

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Aleksey Kolokolov

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Davide Pirino (Contact Author)

Department of Economics and Finance, University of Rome "Tor Vergata" ( email )

Via Columbia 2
Rome, Lazio 00133
Italy

Roberto Renò

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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