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
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: Suggested Citation