Illiquidity Premia in the Equity Options Market

Peter Christoffersen, Ruslan Goyenko, Kris Jacobs, Mehdi Karoui

Research output: Working paperResearch

Abstract

Illiquidity is well-known to be a significant determinant of stock and bond returns. We are the first to estimate illiquidity premia in equity option markets using effective spreads for a large cross-section of firms. The risk-adjusted return spread for illiquid over liquid options is 23 bps per day for calls. The spread for puts is somewhat lower but still significant at 13 bps per day. The spread is generally largest for out-of-the money options. The illiquidity premium is robust to different empirical implementations. It is also robust when controlling for various firm-specific variables, including standard measures of illiquidity of the underlying stock, determinants of spreads, and a measure of net demand pressure. The positive illiquidity premium we find is consistent with existing evidence that market makers in the equity options market hold net long positions.
Original languageEnglish
PublisherSSRN: Social Science Research Network
Number of pages59
DOIs
Publication statusPublished - 4 Jul 2014

Cite this

Christoffersen, P., Goyenko, R., Jacobs, K., & Karoui, M. (2014). Illiquidity Premia in the Equity Options Market. SSRN: Social Science Research Network. https://doi.org/10.2139/ssrn.1784868
Christoffersen, Peter ; Goyenko, Ruslan ; Jacobs, Kris ; Karoui, Mehdi. / Illiquidity Premia in the Equity Options Market. SSRN: Social Science Research Network, 2014.
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Christoffersen, P, Goyenko, R, Jacobs, K & Karoui, M 2014 'Illiquidity Premia in the Equity Options Market' SSRN: Social Science Research Network. https://doi.org/10.2139/ssrn.1784868

Illiquidity Premia in the Equity Options Market. / Christoffersen, Peter ; Goyenko, Ruslan; Jacobs, Kris; Karoui, Mehdi.

SSRN: Social Science Research Network, 2014.

Research output: Working paperResearch

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Christoffersen P, Goyenko R, Jacobs K, Karoui M. Illiquidity Premia in the Equity Options Market. SSRN: Social Science Research Network. 2014 Jul 4. https://doi.org/10.2139/ssrn.1784868