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

  • Tapiero, Oren J.
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    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378437113002185
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    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 392 (2013)
    Issue (Month): 14 ()
    Pages: 3051-3060

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    Handle: RePEc:eee:phsmap:v:392:y:2013:i:14:p:3051-3060
    Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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