Options Market Liquidity:Theoretical And Empirical Analysis Based On The Option Spread

In this paper,we study the liquidity characteristics in option market from the perspective of option spread.According to the existing empirical researches,option spread is related to maturity effect,options’trading volume,market makers’competition and options’ moneyness.Since there is no literature on the liquidity of option market considering the jump risk of underlying asset,this paper constructs a general equilibrium model including the jump risk of the underlying asset from the hedging behavior of option market makers.The model shows that the bid ask spread is the equilibrium feature of option price in an incomplete market.In the relevant empirical researches,scholars also consider the impact of the underlying asset liquidity factors on the liquidity of the option market.The mostly used alternative variables are the underlying asset trading volume,the underlying asset bid ask spread and the underlying asset volatility.In order to verify the above empirical results,our paper,from the perspective of risk hedging behavior by option market makers,assumes that there is a hedging asset price discount or premium function,and we construct a multiple period dynamic hedging model.Based on the results of numerical analysis of the above two models,we find that the model in our paper can explain most of the empirical findings in the existing researches.In order to further verify the findings,our paper estimates the hedging asset price jump risk and bid ask spread by using the highfrequency data of Taiwan stock weighted index and its index futures,we also estimate the implied volatility and implied volatility spread by using the high-frequency data of its options.In the empirical study,we extract the underlying asset liquidity factor from the underlying option volatility which consists of jump risk and bid ask spread of underlying asset,and we use it to make regression analysis on the option volatility spread.The result shows that the underlying asset liquidity factor has significant explanatory power to the option volatility spread.In addition,the empirical results also verify the maturity effect and the moneyness effect of the implied volatility spread.