Price clustering in individual equity options: Moneyness, maturity and price level
Ap Gwilym, Owain Verousis, Thanos
Ap Gwilym, Owain
Verousis, Thanos
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2013
Journal
The Journal of Futures Markets
Book
Publication Volume
33
Publication Issue
1
Publication Begin page
55
Publication End page
76
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Abstract
Equity options have a significant influence on the price discovery process. This study presents unique evidence of substantial price clustering in individual equity options contracts. A particular contribution arises from investigating competing hypotheses on the roles of moneyness and maturity as determinants of option price clustering. We assert that options price clustering can be decomposed to price level, moneyness, and maturity effects. After controlling for other factors, price clustering has an inverse relation with time-to-maturity. This supports the negotiation hypothesis, but not the price resolution hypothesis. Price clustering also tends to be inversely related to moneyness. This effect is linked to the intrinsic value component of option price. Both the maturity and moneyness effects act in an opposite direction to what would be anticipated on the basis of price level alone; hence, these two effects are identified as additional influences on option price clustering. It is also found that the designated market maker scheme at NYSE Euronext London International Financial Futures Exchange (LIFFE) has little influence on trade price clustering.
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Keywords
Price Clustering, Equity Options