The intraday determination of liquidity in the NYSE LIFFE equity option markets
Verousis, Thanos Ap Gwilym, Owain Chen, Xiao Hua
Verousis, Thanos
Ap Gwilym, Owain
Chen, Xiao Hua
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2016
Journal
The European Journal of Finance
Book
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 dataset of all individual equity options trading at NYSE LIFFE (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 macro-economic 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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Keywords
LIFFE, Options, Liquidity, Bid-Ask Spread, Depth