What Do Options Have to Do with it? Including Information from the Options Market in the Bid-Ask Spread Decomposition

Asia Pacific Journal of Financial Studies, 2009

Posted: 4 Apr 2009

See all articles by David Michayluk

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Laurie Prather

Bond University - Faculty of Business, Technology and Sustainable Development

Li-Anne Elizabeth Woo

Bond University - Finance; UNSW Australia Business School, School of Banking and Finance

Henry Yip

University of New South Wales (UNSW); Financial Research Network (FIRN)

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. This increase is observed irrespective of the degree of option leverage. Further, intraday variation in stock bid-ask spread components are affected by the stock trade size and the extent of imbalance in information-based option trades. Including information from the options market enhances the estimation of the stock bid-ask spread decomposition.

Keywords: Bid-ask spread, decomposition, Huang and Stoll

JEL Classification: G10, G11

Suggested Citation

Michayluk, David and Prather, Laurie and Woo, Li-Anne Elizabeth and Yip, Henry, What Do Options Have to Do with it? Including Information from the Options Market in the Bid-Ask Spread Decomposition. Asia Pacific Journal of Financial Studies, 2009, Available at SSRN: https://ssrn.com/abstract=1372899

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Finance Discipline Group
UTS Business
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Laurie Prather

Bond University - Faculty of Business, Technology and Sustainable Development ( email )

Gold Coast, QLD 4229
Australia

Li-Anne Elizabeth Woo

Bond University - Finance ( email )

Gold Coast, QLD 4229
Australia

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
61-2-9385-5862 (Phone)
61-2-9385-6347 (Fax)

Henry Yip (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia
61 2 93855870 (Phone)
61 2 93856347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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