1. Newcastle University Business School, Newcastle NE1 4SE, UKthanos.verousis@newcastle.ac.uk;3. Bangor Business School, Bangor University, Bangor LL57 2DG, UK;4. Kent Business School, University of Kent, Kent CT2 7PE, UK
Abstract:
This paper examines commonality in liquidity for individual equity options trading in European markets. We use high-frequency data to construct a novel index of liquidity commonality. The approach is able to explain a substantial proportion of the liquidity variation across individual options. The explanatory power of the common liquidity factor is more pronounced during periods of higher market-wide implied volatility. The common factor's impact on individual options' liquidity depends on options' idiosyncratic characteristics. There is some evidence of systematic liquidity spillover effects across these European exchanges.