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Does adverse selection affect bid–ask spreads for options?

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  • Söhnke M. Bartram
  • Frank Fehle
  • David G. Shrider

Abstract

This study examines two different option markets to test whether differences in the level of adverse selection faced by market makers affect the size of bid–ask spreads. The data are from bank‐issued options that trade on EuWax, where market makers face little adverse selection and traditional options that trade on EuRex. The results support the hypothesis that the adverse selection component of the bid–ask spread is important, as options on EuWax have lower bid–ask spreads than comparable options on EuRex. The results show that the adverse selection component represents at least half of the overall bid–ask spreads on the traditional EuRex. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:417–437, 2008

Suggested Citation

  • Söhnke M. Bartram & Frank Fehle & David G. Shrider, 2008. "Does adverse selection affect bid–ask spreads for options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(5), pages 417-437, May.
    • Handle: RePEc:wly:jfutmk:v:28:y:2008:i:5:p:417-437
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    Cited by:

    1. A. Bernales, 2014. "The Effects of Information Asymmetries on the Ex-Post Success of Stock Option Listings," Working papers 495, Banque de France.
    2. Rainer Baule & Bart Frijns & Milena E. Tieves, 2018. "Volatility discovery and volatility quoting on markets for options and warrants," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(7), pages 758-774, July.
    3. Entrop, Oliver & Fischer, Georg, 2019. "Hedging costs and joint determinants of premiums and spreads in structured financial products," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-34-19, University of Passau, Faculty of Business and Economics.
    4. Judith Glaser & Pascal Heider, 2012. "Arbitrage-free approximation of call price surfaces and input data risk," Quantitative Finance, Taylor & Francis Journals, vol. 12(1), pages 61-73, August.
    5. Alejandro Bernales & Massimo Guidolin, 2013. "The Effects of Information Asymmetries on the Success of Stock Option Listings," Working Papers 484, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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