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Clustering of Trading Activity in the DAX Index Options Market

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  • Koch, Alexander K.
  • Lazarov, Zdravetz

Abstract

Trades in DAX index options with identical maturities cluster around particular classes of strike prices. For example, options with strikes ending on 50 are less traded than options with strikes ending on 00. Clustering is higher when options with close strike prices are good substitutes. The degree of substitution between options with neighboring strikes depends on the strike price grid and options' characteristics. Using regression analysis we analyze the relation between clustering, grid size, and the options' characteristics. To our knowledge this paper is the first to explore how the grid size of strike prices affects options' trading volume.

Suggested Citation

  • Koch, Alexander K. & Lazarov, Zdravetz, 2001. "Clustering of Trading Activity in the DAX Index Options Market," Bonn Econ Discussion Papers 30/2001, University of Bonn, Bonn Graduate School of Economics (BGSE).
    • Handle: RePEc:zbw:bonedp:302001
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    References listed on IDEAS

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    1. Grossman, Sanford J & Miller, Merton H & Cone, Kenneth R & Fischel, Daniel R & Ross, David J, 1997. "Clustering and Competition in Asset Markets," Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 23-60, April.
    2. George, Thomas J. & Longstaff, Francis A., 1993. "Bid-Ask Spreads and Trading Activity in the S&P 100 Index Options Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(3), pages 381-397, September.
    3. Clifford A. Ball & Walter N. Torous & Adrian E. Tschoegl, 1985. "The degree of price resolution: The case of the gold market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 5(1), pages 29-43, March.
    4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    5. Harris, Lawrence, 1991. "Stock Price Clustering and Discreteness," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 389-415.
    6. 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.
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    Cited by:

    1. He, Yan & Wu, Chunchi, 2004. "Price rounding and bid-ask spreads before and after the decimalization," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 19-41.

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    More about this item

    Keywords

    Clustering; Incidental Truncation; Index Options; Volume;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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