What Do Options Have to Do With It?: Inclusion of Options Market Indicators in Bid-ask Spread Decomposition

David Michayluk (), Laurie Prather, Li-Anne E. Woo and Henry Y. K. Yip
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Laurie Prather: Bond University
Li-Anne E. Woo: Bond University
Henry Y. K. Yip: University of NSW

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: This paper develops a cross-market model to extend Huang and Stoll (1997) by utilizing information from trade flows in the options market. Empirical tests reveal a significant increase in the estimated adverse information component, which stays consistent irrespective of the degree of option leverage. Further, intraday variation in stock bid-ask spread components is affected by the stock trade size and the extent of imbalance in information-based option trades. Including the options market information in decomposition of the stock bid-ask spread enhances the quality of its estimation.

Keywords: Bid-ask Spread Decomposition; Cross-Market Model; Order-driven market; Option Trade Indicator; Information Asymmetry (search for similar items in EconPapers)
JEL-codes: G14 G15 G19 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2009-01-01
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Citations: View citations in EconPapers (2)

Published as: Michayluk, D., Prather, L., Woo, L. and Yip, H., 2009, "What do options have to do with it?: Inclusion of options market indicators in bid-ask spread decomposition", Asia-Pacific Journal Of Financial Studies, 38(3), 455-489.

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