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A Discrete Choice Approach to Measuring Competition in Equity Option Markets

Author

Listed:
  • Michelle A. Danis

    (Office of Federal Housing Enterprise Oversight)

Abstract

This paper examines the relationship between exchange entry and competition in equity option markets. Exchanges compete in thousands of distinct markets, and the entry pattern in each market gives valuable information about profitability. By using a strategic framework, it is assumed that exchanges make interrelated entry decisions. In equilibrium, profits depend on the number of exchanges and in turn the number of exchanges depends on the profit available in a market. This is translated into a discrete choice model of exchange entry behavior.

Suggested Citation

  • Michelle A. Danis, 2003. "A Discrete Choice Approach to Measuring Competition in Equity Option Markets," FHFA Staff Working Papers 03-05, Federal Housing Finance Agency.
    • Handle: RePEc:hfa:wpaper:03-05
    as

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    File URL: https://www.fhfa.gov/research/papers/wp0305
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    References listed on IDEAS

    as
    1. Maarten Janssen & Eric Rasmusen, 2002. "Bertrand Competition Under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 50(1), pages 11-21, March.
    2. Stewart Mayhew & Vassil Mihov, 2000. "Another Look at Option Listing Effects," Finance 0004002, University Library of Munich, Germany.
    3. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-959, July.
    4. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    5. Kooreman, Peter, 1994. "Estimation of Econometric Models of Some Discrete Games," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(3), pages 255-268, July-Sept.
    6. Marcus Asplund & Rickard Sandin, 1999. "The Number of Firms and Production Capacity in Relation to Market Size," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 69-85, March.
    7. Toivanen, Otto & Waterson, Michael, 2000. "Empirical research on discrete choice game theory models of entry: An illustration," European Economic Review, Elsevier, vol. 44(4-6), pages 985-992, May.
    8. Amemiya, Takeshi, 1974. "Multivariate Regression and Simultaneous Equation Models when the Dependent Variables Are Truncated Normal," Econometrica, Econometric Society, vol. 42(6), pages 999-1012, November.
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    Cited by:

    1. Xiao, Mo & Orazem, Peter F., 2011. "Does the fourth entrant make any difference?: Entry and competition in the early U.S. broadband market," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 547-561, September.
    2. Michelle A. Danis, 2004. "Measurement of the Bid-Ask Spread in Equity Option Markets," FHFA Staff Working Papers 04-02, Federal Housing Finance Agency.
    3. Xiao, Mo & Orazem, Peter, 2006. "Do Entry Conditions Vary over Time? Entry and Competition in the Broadband Market: 1999-2003," Staff General Research Papers Archive 12500, Iowa State University, Department of Economics.

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