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A maximum (non-extensive) entropy approach to equity options bid–ask spread

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  • Tapiero, Oren J.

Abstract

The cross-section of options bid–ask spreads with their strikes are modelled by maximising the Kaniadakis entropy. A theoretical model results with the bid–ask spread depending explicitly on the implied volatility; the probability of expiring at-the-money and an asymmetric information parameter (κ). Considering AIG as a test case for the period between January 2006 and October 2008, we find that information flows uniquely from the trading activity in the underlying asset to its derivatives. Suggesting that κ is possibly an option implied measure of the current state of trading liquidity in the underlying asset.

Suggested Citation

  • Tapiero, Oren J., 2013. "A maximum (non-extensive) entropy approach to equity options bid–ask spread," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(14), pages 3051-3060.
  • Handle: RePEc:eee:phsmap:v:392:y:2013:i:14:p:3051-3060
    DOI: 10.1016/j.physa.2013.03.015
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    References listed on IDEAS

    as
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