NDLI: Stock Illiquidity, Option Prices, and Option Returns

Content Provider	Scilit
Author	Kanne, Stefan Korn, Olaf Uhrig-Homburg, Marliese
Copyright Year	2016
Description	Journal: SSRN Electronic Journal We provide evidence of a strong effect of the underlying stock’s illiquidity on option prices by showing that the average absolute difference between historical and implied volatility increases with stock illiquidity. This pattern translates into significant excess returns of option trading strategies that are not explained by common risk factors. Simulation results show, however, that our results can be explained by the hedging costs of market makers who are sometimes net long and sometimes net short in options. Our empirical findings are robust with respect to the chosen illiquidity measure, the measure of option expensiveness, and the return period.
Related Links	https://www.econstor.eu/bitstream/10419/146777/1/869413082.pdf https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2699529
ISSN	10914358
e-ISSN	15565068
DOI	10.2139/ssrn.2699529
Journal	SSRN Electronic Journal
Language	English
Publisher	Elsevier BV
Publisher Date	2016-06-01
Access Restriction	Open
Subject Keyword	Journal: SSRN Electronic Journal Equity Options Option Returns Option Strategies
Content Type	Text
Resource Type	Article
Subject	Public Health, Environmental and Occupational Health Psychiatry and Mental Health

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