Too many options? Theory and evidence on option exchange design
✍ Scribed by Frank Fehle
- Publisher
- John Wiley and Sons
- Year
- 2006
- Tongue
- English
- Weight
- 235 KB
- Volume
- 26
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
A model of option exchange design is proposed and tested. The model allows investors to choose among several exchange-traded options based on a trade-off between standardization costs and liquidity/transaction costs. It employs a spatial economics approach to provide results for the existence of markets for particular option contracts on the exchange, a comparison of exchange design by a social planner and a profit-maximizing monopolist (corresponding to the idea that most derivatives exchanges centralize the design and creation of option contracts), and comparative statics that can potentially aid decision makers in the design of option exchanges. In the empirical work, open interest is analyzed for Chicago Board Options Exchange (CBOE) options on the stocks in the S&P 100 index. In accordance with the model's predictions, open interest forms a Part of this research project was carried out while I was an Assistant Professor of Finance at the University of South Carolina. I would like to thank J. Michael Davis and Jason H. Wade who carried out data collection and preparation for this paper as part of their senior thesis project, "Implied Option Volatilities" at the University of South Carolina Honors College. I would also like to thank an anonymous referee,