This paper investigates empirically the direct effect of option trading on the structure of costs that comprise the underlying equity bid-ask spread. Our results show that the spread declines over a 30-day period following initiation of option trading, but the decline vanishes when price, volume, and volatility effects are considered. Changes in the composition of the spread reflect primarily a reduction in adverse information costs. Additionally, consistent with previous research, we find significant transaction-type clustering in our intraday data.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Oct 21, 2004
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