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Systematic Noise: Micro-movements in Equity Options Markets

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  • Adam Wu

Abstract

Equity options are known to be notoriously difficult to price accurately, and even with the development of established mathematical models there are many assumptions that must be made about the underlying processes driving market movements. As such, the theoretical prices outputted by these models are often slightly different from the realized or actual market price. The choice of model traders use can create many different valuations on the same asset, which may lead to a form of systematic micro-movement or noise. The analysis in this paper demonstrates that approximately 1.7%-4.5% of market volume for options written on the SPY ETF within the last two years could potentially be due to systematic noise.

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  • Adam Wu, 2017. "Systematic Noise: Micro-movements in Equity Options Markets," Papers 1708.06855, arXiv.org.
    • Handle: RePEc:arx:papers:1708.06855
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    1. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. "Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-320, June.
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    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    4. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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