Zeros

Federico M. Bandi (), Aleksey Kolokolov (), Davide Pirino () and Roberto Renòo ()
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Federico M. Bandi: Carey Business School, Johns Hopkins University, Baltimore, Maryland 21202; EDHEC-Risk Institute, EDHEC Business School, 06202 Nice, Cedex 3, France
Aleksey Kolokolov: Alliance Manchester Business School, University of Manchester, Manchester M15 6PB, United Kingdom
Davide Pirino: Dipartimento di Economia e Finanza, Università degli Studi di Roma Tor Vergata, 00133 Roma, Italy; Scuola Normale Superiore, 56126 Pisa, Italy
Roberto Renòo: Dipartimento di Scienze Economiche, Università di Verona, 37129 Verona, Italy

Management Science, 2020, vol. 66, issue 8, 3466-3479

Abstract: Asset prices can be stale. We define price staleness as a lack of price adjustments yielding zero returns (i.e., zeros). The term idleness (respectively, near idleness ) is, instead, used to define staleness when trading activity is absent (respectively, close to absent). Using statistical and pricing metrics, we show that zeros are a genuine economic phenomenon linked to the dynamics of trading volume and, therefore, liquidity. Zeros are, in general, not the result of institutional features, like price discreteness. In essence, spells of idleness or near idleness are stylized facts suggestive of a key, omitted market friction in the modeling of asset prices. We illustrate how accounting for this friction may generate sizable risk compensations in short-dated option returns.

Keywords: volume; liquidity; short-term options (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:66:y:2020:i:8:p:3466-3479

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