A maximum (non-extensive) entropy approach to equity options bid–ask spread
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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Volume (Year): 392 (2013)
Issue (Month): 14 ()
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