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Title
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Implied liquidity risk premia in option markets
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Author
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Abstract
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| The theory of conic finance replaces the classical one-price model by a two-price model by determining bid and ask prices for future terminal cash flows in a consistent manner. In this framework, we derive closed-form solutions for bid and ask prices of plain vanilla European options, when the density of the log-returns is log-concave. Assuming that log-returns are normally or Laplace distributed, we apply the results to a time-series of real market data and compute an implied liquidity risk premium to describe the bid-ask spread. We compare this approach to the classical attempt of describing the spread by quoting Black-Scholes implied bid and ask volatilities and demonstrate that the new approach characterize liquidity over time significantly better. |
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Language
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English
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Source (journal)
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Annals of Finance. - Berlin
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Publication
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Berlin
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2019
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ISSN
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1614-2446
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DOI
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10.1007/S10436-018-0339-Y
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Volume/pages
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15
:2
(2019)
, p. 233-246
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ISI
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000469879900004
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Full text (Publisher's DOI)
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Full text (publisher's version - intranet only)
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