On the liquidity of CAC 40 index options market

Alain François-Heude and Ouidad Yousfi ()
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Alain François-Heude: MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UPVM - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School

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Abstract: The current article shows that CAC 40 index options (namely PXA) display some illiquidity problems. We examine daily data on PXA trades between May 2005 and August 2012. The study evidences the presence of a considerable number of outstanding PXA contracts; most of these options are long-term maturity options and are deep in or deep out the money options. To overcome the highlighted liquidity issues, we propose first to test the generalization of Gray and Whaley reset option introduced by François-Heude and Yousfi. The main idea is to reset the strike price PXA option to a new strike price given by the CAC 40 value at a pre-agreed point of time. Then we provide some additional measures regarding the number of the PXA strike price series and the PXA expiration dates. Finally, we test them on PXA market. Results show a significant and positive effect on the PXA liquidity.

Keywords: strike reset; option; PXA; liquidity; reset option (search for similar items in EconPapers)
Date: 2014-08
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Published in Journal of derivatives & Hedge Funds, 2014, 20 (3), pp.177-198. ⟨10.1057/jdhf.2014.18⟩

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Working Paper: On the liquidity of CAC 40 index options Market (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02050806

DOI: 10.1057/jdhf.2014.18

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