IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-02050806.html
   My bibliography  Save this paper

On the liquidity of CAC 40 index options market

Author

Listed:
  • Alain François-Heude

    (MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UPVM - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School)

  • Ouidad Yousfi

    (MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UPVM - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School)

Abstract

The current article shows that CAC 40 index options (namely PXA) display some illiquidity problems. We examine daily data on PXA trades between May 2005 and August 2012. The study evidences the presence of a considerable number of outstanding PXA contracts; most of these options are long-term maturity options and are deep in or deep out the money options. To overcome the highlighted liquidity issues, we propose first to test the generalization of Gray and Whaley reset option introduced by François-Heude and Yousfi. The main idea is to reset the strike price PXA option to a new strike price given by the CAC 40 value at a pre-agreed point of time. Then we provide some additional measures regarding the number of the PXA strike price series and the PXA expiration dates. Finally, we test them on PXA market. Results show a significant and positive effect on the PXA liquidity.

Suggested Citation

  • Alain François-Heude & Ouidad Yousfi, 2014. "On the liquidity of CAC 40 index options market," Post-Print hal-02050806, HAL.
    • Handle: RePEc:hal:journl:hal-02050806
    DOI: 10.1057/jdhf.2014.18
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
    2. Laurent Deville & Fabrice Riva, 2007. "Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach," Review of Finance, European Finance Association, vol. 11(3), pages 497-525.
    3. Young-Hye Cho & Robert F. Engle, 1999. "Modeling the Impacts of Market Activity on Bid-Ask Spreads in the Option Market," NBER Working Papers 7331, National Bureau of Economic Research, Inc.
    4. Richard Roll & Eduardo Schwartz & Avanidhar Subrahmanyam, 2007. "Liquidity and the Law of One Price: The Case of the Futures‐Cash Basis," Journal of Finance, American Finance Association, vol. 62(5), pages 2201-2234, October.
    5. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    6. Fabrice Riva & Laurent Deville, 2004. "The Determinants of the Time to Efficiency in Options Markets: A Survival Analysis Approach," Post-Print halshs-00163228, HAL.
    7. Kamara, Avraham & Miller, Thomas W., 1995. "Daily and Intradaily Tests of European Put-Call Parity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(4), pages 519-539, December.
    8. Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, vol. 59(2), pages 711-753, April.
    9. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    10. Amihud, Yakov & Mendelson, Haim & Pedersen, Lasse Heje, 2006. "Liquidity and Asset Prices," Foundations and Trends(R) in Finance, now publishers, vol. 1(4), pages 269-364, February.
    11. repec:dau:papers:123456789/2399 is not listed on IDEAS
    12. Rendleman, Richard J. & Bartter, Brit J., 1980. "The Pricing of Options on Debt Securities," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(1), pages 11-24, March.
    13. Amihud, Yakov & Mendelson, Haim, 1991. "Liquidity, Maturity, and the Yields on U.S. Treasury Securities," Journal of Finance, American Finance Association, vol. 46(4), pages 1411-1425, September.
    14. H. A. Windcliff & P. A. Forsyth & K. R. Vetzal, 2006. "Numerical Methods and Volatility Models for Valuing Cliquet Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(4), pages 353-386.
    15. Gunther Capelle-Blancard & Mo Chaudhury, 2007. "Price clustering in the CAC 40 index options market," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00265668, HAL.
    16. Marcellino Gaudenzi & Antonino Zanette, 2011. "Pricing cliquet options by tree methods," Computational Management Science, Springer, vol. 8(1), pages 125-135, April.
    17. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
    18. Stephen F. Gray & Robert E. Whaley, 1999. "Reset Put Options: Valuation, Risk Characteristics, and an Application," Australian Journal of Management, Australian School of Business, vol. 24(1), pages 1-20, June.
    19. Johnson, Herb, 1987. "Options on the Maximum or the Minimum of Several Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 277-283, September.
    20. Kamara, Avraham, 1994. "Liquidity, Taxes, and Short-Term Treasury Yields," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(3), pages 403-417, September.
    21. Lamya Kermiche, 2009. "Dynamics of Implied Distributions: Evidence from the CAC 40 Options Market," Finance, Presses universitaires de Grenoble, vol. 30(2), pages 63-103.
    22. repec:dau:papers:123456789/1381 is not listed on IDEAS
    23. repec:dau:papers:123456789/2400 is not listed on IDEAS
    24. RØdiger Frey, 1998. "Perfect option hedging for a large trader," Finance and Stochastics, Springer, vol. 2(2), pages 115-141.
    25. 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.
    26. Eleswarapu, Venkat R, 1997. "Cost of Transacting and Expected Returns in the Nasdaq Market," Journal of Finance, American Finance Association, vol. 52(5), pages 2113-2127, December.
    27. Liu, Weimin, 2006. "A liquidity-augmented capital asset pricing model," Journal of Financial Economics, Elsevier, vol. 82(3), pages 631-671, December.
    28. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    29. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. François-Heude, Alain & Yousfi, Ouidad, 2013. "On the liquidity of CAC 40 index options Market," MPRA Paper 47921, University Library of Munich, Germany, revised 01 Jul 2013.
    2. Peter Christoffersen & Ruslan Goyenko & Kris Jacobs & Mehdi Karoui, 2018. "Illiquidity Premia in the Equity Options Market," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 811-851.
    3. Lin, Zih-Ying & Chang, Chuang-Chang & Wang, Yaw-Huei, 2018. "The impacts of asymmetric information and short sales on the illiquidity risk premium in the stock option market," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 152-165.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    5. Jianhui Li & Sebastian A. Gehricke & Jin E. Zhang, 2019. "How do US options traders “smirk” on China? Evidence from FXI options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(11), pages 1450-1470, November.
    6. Belkhir, Mohamed & Saad, Mohsen & Samet, Anis, 2020. "Stock extreme illiquidity and the cost of capital," Journal of Banking & Finance, Elsevier, vol. 112(C).
    7. Yakov Amihud & Haim Mendelson, 2015. "The Pricing of Illiquidity as a Characteristic and as Risk," Multinational Finance Journal, Multinational Finance Journal, vol. 19(3), pages 149-168, September.
    8. Carlo Favero & Marco Pagano & Ernst-Ludwig von Thadden, 2005. "Valutation, Liquidity and Risk in Government Bond Markets," Working Papers 281, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    9. Jimmy E. Hilliard & Jitka Hilliard, 2017. "Option pricing under short-lived arbitrage: theory and tests," Quantitative Finance, Taylor & Francis Journals, vol. 17(11), pages 1661-1681, November.
    10. François-Heude, Alain & Yousfi, Ouidad, 2013. "A Generalization of Gray and Whaley's Option," MPRA Paper 47908, University Library of Munich, Germany, revised 30 Jun 2013.
    11. Connor J.A. Stuart & Sebastian A. Gehricke & Jin E. Zhang & Xinfeng Ruan, 2021. "Implied volatility smirk in the Australian dollar market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4573-4599, September.
    12. Chen, Chin-Ho, 2019. "Downside jump risk and the levels of futures-cash basis," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    13. Szymon Stereńczak, 2020. "State-Dependent Stock Liquidity Premium: The Case of the Warsaw Stock Exchange," IJFS, MDPI, vol. 8(1), pages 1-24, March.
    14. Andres, Christian & Cumming, Douglas & Karabiber, Timur & Schweizer, Denis, 2014. "Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 133-156.
    15. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742.
    16. Olaf Korn & Paolo Krischak & Erik Theissen, 2019. "Illiquidity transmission from spot to futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(10), pages 1228-1249, October.
    17. Favero, Carlo & Pagano, Marco & von Thadden, Ernst-Ludwig, 2010. "How Does Liquidity Affect Government Bond Yields?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(1), pages 107-134, February.
    18. Li, Shaoyu & Zhang, Teng & Li, Yingxiang, 2019. "Flight-to-liquidity: Evidence from China's stock market," Emerging Markets Review, Elsevier, vol. 38(C), pages 159-181.
    19. Jun, Sang-Gyung & Marathe, Achla & Shawky, Hany A., 2003. "Liquidity and stock returns in emerging equity markets," Emerging Markets Review, Elsevier, vol. 4(1), pages 1-24, March.
    20. Choy, Siu Kai & Wei, Jason, 2020. "Liquidity risk and expected option returns," Journal of Banking & Finance, Elsevier, vol. 111(C).

    More about this item

    Keywords

    strike reset; option; PXA; liquidity; reset option;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-02050806. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.