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What Do Options Have to Do With It?: Inclusion of Options Market Indicators in Bid-ask Spread Decomposition

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Abstract

This paper develops a cross-market model to extend Huang and Stoll (1997) by utilizing information from trade flows in the options market. Empirical tests reveal a significant increase in the estimated adverse information component, which stays consistent irrespective of the degree of option leverage. Further, intraday variation in stock bid-ask spread components is affected by the stock trade size and the extent of imbalance in information-based option trades. Including the options market information in decomposition of the stock bid-ask spread enhances the quality of its estimation.

Suggested Citation

  • David Michayluk & Laurie Prather & Li-Anne E. Woo & Henry Y. K. Yip, 2009. "What Do Options Have to Do With It?: Inclusion of Options Market Indicators in Bid-ask Spread Decomposition," Published Paper Series 2009-1, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:ppaper:2009-1
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    File URL: https://onlinelibrary.wiley.com/doi/full/10.1111/j.2041-6156.2009.tb00020.x
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    Cited by:

    1. Henk Berkman & Carole Comerton‐Forde, 2011. "Market microstructure: A review from down under," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(1), pages 50-78, March.
    2. Doojin Ryu, 2011. "Intraday price formation and bid–ask spread components: A new approach using a cross‐market model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(12), pages 1142-1169, December.

    More about this item

    Keywords

    Bid-ask Spread Decomposition; Cross-Market Model; Order-driven market; Option Trade Indicator; Information Asymmetry;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other

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