A maximum (non-extensive) entropy approach to equity options bid–ask spread

Oren J. Tapiero

Physica A: Statistical Mechanics and its Applications, 2013, vol. 392, issue 14, 3051-3060

Abstract: The cross-section of options bid–ask spreads with their strikes are modelled by maximising the Kaniadakis entropy. A theoretical model results with the bid–ask spread depending explicitly on the implied volatility; the probability of expiring at-the-money and an asymmetric information parameter (κ). Considering AIG as a test case for the period between January 2006 and October 2008, we find that information flows uniquely from the trading activity in the underlying asset to its derivatives. Suggesting that κ is possibly an option implied measure of the current state of trading liquidity in the underlying asset.

Keywords: Kaniadakis Entropy; Bid–ask spread; Asymmetric information (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:392:y:2013:i:14:p:3051-3060

DOI: 10.1016/j.physa.2013.03.015

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