What do options have to do with it?: Inclusion of options market indicators in bid-ask spread decomposition

Publisher:
Korean Securities Association
Publication Type:
Journal Article
Citation:
Asia-Pacific Journal Of Financial Studies, 2009, 38 (3), pp. 455 - 489
Issue Date:
2009-01
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This paper develops a cross-market model to extend Huang and Stoll (1997) by utilizing information from trade flows in the options market. Empirical tests reveal a significant increase in the estimated adverse information component, which stays consistent irrespective of the degree of option leverage. Further, intraday variation in stock bid-ask spread components is affected by the stock trade size and the extent of imbalance in information-based option trades. Including the options market information in decomposition of the stock bid-ask spread enhances the quality of its estimation.
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