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Market making in the options markets and the costs of discrete hedge rebalancing

Article Abstract:

In this paper we provide empirical evidence consistent with the hypothesis that options market makers face risks in managing inventory that are unique to the options markets. In particular, we show that risks associated with the inability to rebalance an option position continuously and uncertainty about the return volatility of the underlying stock each account for a statistically and economically significant proportion of the bid-ask spreads quoted for a sample of Chicago Board Options Exchange options. (Reprinted by permission of the publisher.)

Research

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The high-volume return premium

Article Abstract:

Shocks in a stock's trading activity increases its visibility, in turn affecting its demand and price for that stock. Stocks with unusual trading volume, high or low, over a day or a week tend to significantly appreciate or depreciate over the next month, suggesting a high-volume return premium for stock prices.

Stocks & Other Equity Securities, Statistical Data Included

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The effect of options on stock prices: 1973 to 1995

Article Abstract:

Options introduced in 1973 created abnormal returns until 1980 and abnormally negative returns from 1981 to 1995. This switch may have been caused by index options introduced in 1982, regulatory changes in 1981, and the chance that options encourage disseminating negative information.

Stock Options, Executive compensation

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