Illiquidity Premia in the Equity Options Market

Peter Christoffersen, Ruslan Goyenko (), Kris Jacobs () and Mehdi Karoui ()
Additional contact information
Ruslan Goyenko: McGill University - Faculty of Management, Postal: 1001 Sherbrooke St. West, Montreal, Quebec H3A1G5 H3A 2M1, Canada
Kris Jacobs: University of Houston - C.T. Bauer College of Business, Postal: Houston, TX 77204-6021, United States
Mehdi Karoui: McGill University, Postal: 1001 Sherbrooke St. W, Montreal, Quebec H3A 1G5, Canada

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Illiquidity is well-known to be a signi?cant determinant of stock and bond returns. We report on illiquidity premia in equity option markets. An increase in option illiquidity decreases the current option price and predicts higher expected option returns. This effect is statistically and economically signi?cant. It is robust across different empirical approaches and when including various control variables. The illiquidity of the underlying stock affects the option return negatively, consistent with a hedging argument: When stock market illiquidity increases, the cost of replicating the option goes up, which increases the option price and reduces its expected return.

Keywords: illiquidity; equity options; cross-section; option returns; option smile. (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 47
Date: 2011-04-19
New Economics Papers: this item is included in nep-cfn and nep-fmk
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Illiquidity Premia in the Equity Options Market (2018)
Working Paper: Illiquidity Premia in the Equity Options Market (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2011-43

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