The Effect of Option Trading on the Structure of Equity Bid/Ask Spreads |
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Authors: | Kim Suhkyong Diltz J David |
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Institution: | (1) Seo-Kyeong University, Seoul, Korea;(2) Finance and Real Estate Department, University of Texas at Arlington, Box 19449, College of Business Administration, Texas, 76019 |
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Abstract: | This paper investigates empirically the direct effect of option trading on the structure of costs that comprise the underlying equity bid-ask spread. Our results show that the spread declines over a 30-day period following initiation of option trading, but the decline vanishes when price, volume, and volatility effects are considered. Changes in the composition of the spread reflect primarily a reduction in adverse information costs. Additionally, consistent with previous research, we find significant transaction-type clustering in our intraday data. |
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Keywords: | options bid/ask spread decomposition |
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