The intraday determination of liquidity in the NYSE LIFFE equity option markets
Verousis, Thanos Gwilym, Owain ap Chen, XiaoHua
Verousis, Thanos
Gwilym, Owain ap
Chen, XiaoHua
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Journal article with impact factor
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Supervisor
Publication Year
2016-09-25
Journal
European Journal of Finance
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Publication Volume
22
Publication Issue
12
Publication Begin page
1164
Publication End page
1188
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Abstract
We exploit an extensive high-frequency data set of all individual equity options trading at New York Stock Exchange London International Financial Futures and Options Exchange (Amsterdam, London and Paris) in order to study the determination of liquidity during the trading day. In particular, we focus on two main aspects of option liquidity: (i) the intraday behaviour of equity option liquidity and its determinants and (ii) the influence of macroeconomic events and commonality on intraday equity option liquidity. Inventory management models cannot explain the intraday variation in option spreads and depths. Instead, we show that the option liquidity measures are strongly correlated with option volatility. Increases in volatility are associated with decreases in liquidity, a finding that is in line with information asymmetry models and the derivatives hedging theory. However, the relationship between spreads and volume varies across the three markets. Option liquidity reacts strongly to macroeconomic news announcements, especially US events. The average systematic liquidity component is 12% for Amsterdam, 14% for London and 16% for Paris.
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38 Economics, 3502 Banking, Finance and Investment, 3801 Applied Economics, 35 Commerce, Management, Tourism and Services