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Price Clustering in Individual Equity Options: Moneyness, Maturity, and Price Level

ap Gwilym, Owain and Verousis, Thanos (2013) 'Price Clustering in Individual Equity Options: Moneyness, Maturity, and Price Level.' Journal of Futures Markets, 33 (1). 55 - 76. ISSN 0270-7314

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Abstract

Equity options have a significant influence on the price discovery process. This study presents unique evidence of substantial price clustering in individual equity options contracts. A particular contribution arises from investigating competing hypotheses on the roles of moneyness and maturity as determinants of option price clustering. We assert that options price clustering can be decomposed to price level, moneyness, and maturity effects. After controlling for other factors, price clustering has an inverse relation with time‐to‐maturity. This supports the negotiation hypothesis, but not the price resolution hypothesis. Price clustering also tends to be inversely related to moneyness. This effect is linked to the intrinsic value component of option price. Both the maturity and moneyness effects act in an opposite direction to what would be anticipated on the basis of price level alone; hence, these two effects are identified as additional influences on option price clustering. It is also found that the designated market maker scheme at NYSE Euronext London International Financial Futures Exchange (LIFFE) has little influence on trade price clustering.

Item Type: Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 14 Mar 2019 19:47
Last Modified: 14 Mar 2019 20:15
URI: http://repository.essex.ac.uk/id/eprint/24187

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