Title

What do options have to do with it?: Inclusion of options market indicators in bid-ask spread decomposition

Date of this Version

6-1-2009

Document Type

Journal Article

Publication Details

Interim status: Citation only.

Michayluk, D., Prather, L., Woo, Li-Anne E. & Yip, Henry Y. K. (2009). What do options have to do with it?: Inclusion of options market indicators in bid-ask spread. Asia-Pacific journal of financial studies, 38(3), 455-489.

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2009 HERDC submission. FoR code: 1502

© Copyright 2009 AJFS. All rights reserved.

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.

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This document has been peer reviewed.