 Asymmetric Price Distribution and Bid-Ask Quotes in the stock options MarketK. Chan and C.Y. Peter The A. Gary Anderson Graduate School of Management from The A. Gary Anderson Graduate School of Management. University of California Riverside Abstract: We present a model of the bid and ask quotes in the equity option market when option payoffs are asymmetrically distributed due to the limited liability of the option. We then provide empirical evidence for the actively-traded Chicago Board of Options Exchange stock options, which is consistent with the implications of our model. First, the bid and ask quotes are asymmetrical around the option value, with the value being closer to the bid quote than to the ask. Second, the degree of the asymmetry increases as the moneyness of the option decreases. Finally, the ask quote of an options changes more than its bid quote. An important implication of the paper is that the bid-ask midpoint is not an unbiased estimator of the option value, especially for an out-of-the money option. Furthermore, one should be cautious in inferring the trade direction from comparing the trade price with the most recent bid-ask option. Keywords: BIDDING; FINANCIAL MARKET (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fth:caland:97-09 Access Statistics for this paper More papers in The A. Gary Anderson Graduate School of Management from The A. Gary Anderson Graduate School of Management. University of California Riverside The A. Gary Anderson Graduate School of Management. University of California, Riverside. Riverside CA 92521. Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.