2022-09-29 Determination of Bid-ask Prices for Illiquid Options and Applications to Index Options - 莊明哲副教授
＊講 題：Determination of Bid-ask Prices for Illiquid Options and Applications to Index Options
＊時 間：2022年09月29日(四) 12:30-14:30
Two prices – bid and ask prices – have to be quoted on options for market makers. The time-varying bid-ask spread is also regarded as the required illiquidity risk premium for intermediaries. This article provides analytical approximation solutions for the two prices including the dynamic illiquidity premiums. Evidence is found of an illiquidity smile for short-term calls and a negatively sloped illiquidity smirk for long-term calls. Similar results are also verified in the put option prices. The proposed dynamic illiquidity model significantly outperforms the constant illiquidity model in the in sample and out-of-sample tests, especially when the stochastic volatility is a crucial concern.