Option Happiness and Liquidity: Is the Dynamics of the Volatility Smirk Affected by Relative Option Liquidity?
2012 (English)In: Journal of futures markets, ISSN 0270-7314, E-ISSN 1096-9934, Vol. 32, no 1, 47-74 p.Article in journal (Refereed) Published
This study investigates the dynamic relationship between option happiness (the steepness of the volatility smirk) and relative index option liquidity. We find that, on a daily basis, option happiness is significantly dependent on the relative liquidity between option series with different moneyness. In particular, deterioration (improvement) in liquidity of an out-of-the-money put option relative to a concurrent at-the-money call option would lead to higher (lower) option happiness. This relationship is robust to relative option liquidity measures based on bid-ask spreads, option price impacts, and option order book imbalances. The results also show a significant maturity effect in option happiness, consistent with the notion that options are “dying smiling”.
Place, publisher, year, edition, pages
2012. Vol. 32, no 1, 47-74 p.
implied volatility, volatility smirk, option happiness, relative option liquidity
Research subject Business Administration
IdentifiersURN: urn:nbn:se:su:diva-65322DOI: 10.1002/fut.20507ISI: 000297171300003OAI: oai:DiVA.org:su-65322DiVA: diva2:462323