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Option bid-ask spread and scalping risk: Evidence from a covered warrants market

✍ Scribed by Giovanni Petrella

Publisher: John Wiley and Sons
Year: 2006
Tongue: English
Weight: 220 KB
Volume: 26
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20216

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✦ Synopsis

This study develops and empirically tests a simple market microstructure model to capture the main determinants of option bid-ask spread. The model is based on option market making costs (initial hedging, rebalancing, and order processing costs), and incorporates a reservation bid-ask spread that option market makers apply to protect themselves from scalpers. The model is tested on a sample of covered warrants, which are optionlike securities issued by banks, traded on the Italian Stock Exchange. The empirical analysis validates the model. The initial cost of setting up a delta neutral portfolio has been found to be an important I wish to thank an anonymous reviewer,

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