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The square-root impact law also holds for option markets

Author

Listed:
  • Bence Toth
  • Zoltan Eisler
  • Jean-Philippe Bouchaud

Abstract

Many independent studies on stocks and futures contracts have established that market impact is proportional to the square-root of the executed volume. Is market impact quantitatively similar for option markets as well? In order to answer this question, we have analyzed the impact of a large proprietary data set of option trades. We find that the square-root law indeed holds in that case. This finding supports the argument for a universal underlying mechanism.

Suggested Citation

  • Bence Toth & Zoltan Eisler & Jean-Philippe Bouchaud, 2016. "The square-root impact law also holds for option markets," Papers 1602.03043, arXiv.org.
    • Handle: RePEc:arx:papers:1602.03043
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    Citations

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    Cited by:

    1. Emilio Said, 2019. "How Option Hedging Shapes Market Impact," Papers 1910.05056, arXiv.org, revised Nov 2019.
    2. Ismael Lemhadri, 2018. "Market Impact in a Latent Order Book," Papers 1802.06101, arXiv.org, revised Sep 2020.
    3. Emilio Said, 2022. "Market Impact: Empirical Evidence, Theory and Practice," Papers 2205.07385, arXiv.org.
    4. Fabrizio Lillo, 2021. "Order flow and price formation," Papers 2105.00521, arXiv.org.
    5. Emilio Said, 2022. "Market Impact: Empirical Evidence, Theory and Practice," Working Papers hal-03668669, HAL.
    6. Fr'ed'eric Bucci & Iacopo Mastromatteo & Michael Benzaquen & Jean-Philippe Bouchaud, 2019. "Impact is not just volatility," Papers 1905.04569, arXiv.org.
    7. Emilio Said & Ahmed Bel Hadj Ayed & Damien Thillou & Jean-Jacques Rabeyrin & Frédéric Abergel, 2020. "Market Impact: A Systematic Study of the High Frequency Options Market," Post-Print hal-02014248, HAL.
    8. Brunovský, Pavol & Černý, Aleš & Komadel, Ján, 2018. "Optimal trade execution under endogenous pressure to liquidate: Theory and numerical solutions," European Journal of Operational Research, Elsevier, vol. 264(3), pages 1159-1171.
    9. Frédéric Bucci & Iacopo Mastromatteo & Michael Benzaquen & Jean-Philippe Bouchaud, 2019. "Impact is not just volatility," Post-Print hal-02323182, HAL.
    10. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2022. "Cross impact in derivative markets," Post-Print hal-03378903, HAL.
    11. Emilio Said & Ahmed Bel Hadj Ayed & Damien Thillou & Jean-Jacques Rabeyrin & Frédéric Abergel, 2019. "Market Impact: A Systematic Study of the High Frequency Options Market," Working Papers hal-02014248, HAL.
    12. Ismael Lemhadri, 2018. "Market impact in a latent order book," Working Papers hal-01711192, HAL.
    13. Masaaki Fukasawa & Mitja Stadje, 2018. "Perfect hedging under endogenous permanent market impacts," Finance and Stochastics, Springer, vol. 22(2), pages 417-442, April.
    14. Ioanna-Yvonni Tsaknaki & Fabrizio Lillo & Piero Mazzarisi, 2023. "Online Learning of Order Flow and Market Impact with Bayesian Change-Point Detection Methods," Papers 2307.02375, arXiv.org, revised May 2024.
    15. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2021. "Cross impact in derivative markets," Working Papers hal-03378903, HAL.
    16. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2021. "Cross impact in derivative markets," Papers 2102.02834, arXiv.org, revised Mar 2022.
    17. Zoltan Eisler & Jean-Philippe Bouchaud, 2016. "Price impact without order book: A study of the OTC credit index market," Papers 1609.04620, arXiv.org.
    18. Emilio Said, 2019. "How Option Hedging Shapes Market Impact," Working Papers hal-02310080, HAL.
    19. Emilio Said & Ahmed Bel Hadj Ayed & Damien Thillou & Jean-Jacques Rabeyrin & Fr'ed'eric Abergel, 2019. "Market Impact: A Systematic Study of the High Frequency Options Market," Papers 1902.05418, arXiv.org, revised May 2022.

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