Market Illiquidity and the Bid-Ask Spread of Derivatives

Amaro de Matos, João; Antão, Paula

http://hdl.handle.net/10362/84957

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Autores

Amaro de Matos, João

Antão, Paula

Resumo(s)

This paper analyzes the impact of illiquidity of a stock on the pricing of derivatives. In particular, it is shown how illiquidity generates a bid-ask spread in an option on this stock, even in the absence of other imperfections, such as transaction costs and asymmetry of information. Moreover, the spread is shown to be asymmetric with respect to the option price under perfect liquidity. This fact explains the appearance of a smile effect when the implied volatility is estimated from the mid-quote.

URI

http://hdl.handle.net/10362/84957

Citação

Amaro de Matos, João and Antão, Paula, Market Illiquidity and the Bid-Ask Spread of Derivatives (March, 2000). FEUNL Working Paper Series No. 386

Editora

Nova SBE

Coleções

NSBE - Working Paper Series

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