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Aggregate illiquidity and crypto option returns

Author

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  • Atanasova, Christina
  • Miao, Terrel
  • Segarra, Ignacio
  • Willeboordse, Frederick

Abstract

We examine how market makers’ inventory imbalances contribute to aggregate illiquidity in the Bitcoin options market. Using high-frequency trade and quote data from Deribit between January 2021 and December 2024, we develop a measure of aggregate gamma inventory (AGI) that reflects the extent of dynamic rebalancing market makers require to manage their exposures. When AGI is negative, market makers trade in the same direction as BTC price momentum, amplifying price pressure and increasing trading costs. Option spreads widen as AGI becomes more negative, consistent with rising costs of maintaining near delta-neutral positions. On average, a one-standard-deviation decrease in AGI is associated with a 0.12% (0.19%) increase in effective spreads for out-of-the-money calls (puts). We estimate a dynamic factor model and show that illiquidity loads significantly on the first latent factor priced in BTC option returns. These findings underscore the role of illiquidity in nascent derivatives markets.

Suggested Citation

  • Atanasova, Christina & Miao, Terrel & Segarra, Ignacio & Willeboordse, Frederick, 2025. "Aggregate illiquidity and crypto option returns," Finance Research Letters, Elsevier, vol. 85(PC).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pc:s1544612325012619
    DOI: 10.1016/j.frl.2025.108003
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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