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Who Offers Liquidity on Options Markets when Volatility is High?

Author

Listed:
  • Matthew C. Chang

    (Department of Wealth Management and Department of Business Administration, Hsuan Chuang University, No. 48, Hsuan Chuang Rd., Hsinchu City, 300, Taiwan)

  • Chung-Fern Wu

    (Department of Accounting, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei City, 106, Taiwan)

Abstract

In this paper, we investigate the relationship between volatility of and liquidity provision through the aggregation of high-frequency data on the stock index option markets of Taiwan. Strong evidence shows the different behaviors of liquidity supply for market makers and nonmarket makers. In addition, evidence demonstrates that nonmarket makers are unwilling to offer liquidity on buy-side when option price is high, but the phenomena are not evident for the market makers. Overall, nonmarket makers provide less liquidity when volatility is high. In contrast, market makers provide the same or more liquidity on the limit order book when volatility is high. Therefore, the market makers play more important a role when market is volatile. The policy implication is that professional market makers on option markets are stable forces to offer liquidity when market is volatile, and it is referable for those pure order-driven option markets without market makers (e.g., Korea Exchange, KRX).

Suggested Citation

  • Matthew C. Chang & Chung-Fern Wu, 2012. "Who Offers Liquidity on Options Markets when Volatility is High?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 15(04), pages 1-24.
    • Handle: RePEc:wsi:rpbfmp:v:15:y:2012:i:04:n:s021909151250021x
    DOI: 10.1142/S021909151250021X
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    Citations

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    Cited by:

    1. Yu-Lun Chen & Yin-Feng Gau & Wen-Ju Liao, 2016. "Trading activities and price discovery in foreign currency futures markets," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 793-818, May.
    2. Oleg Sokolinskiy, 2020. "Conditional dependence in post-crisis markets: dispersion and correlation skew trades," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 389-426, August.

    More about this item

    Keywords

    Depths of limit order books; volatility; market makers; option markets; Taiwan Futures Exchange;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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