← Search

Illiquidity Premia in the Equity Options Market

Peter Christoffersen1; Ruslan Goyenko2; Kris Jacobs3; Mehdi Karoui4

1 University of Toronto, Copenhagen Business School, and FRIC · 2 McGill University · 3 University of Houston · 4 OMERS

Review of Financial Studies 2018 open access

Standard option valuation models leave no room for option illiquidity premia. Yet we find the risk-adjusted return spread for illiquid over liquid equity options is 3.4% per day for at-the-money calls and 2.5% for at-the-money puts. These premia are computed using option illiquidity measures constructed from intraday effective spreads for a large panel of U.S. equities, and they are robust to different empirical implementations. Our findings are consistent with evidence that market makers in the equity options market hold large and risky net long positions, and positive illiquidity premia compensate them for the risks and costs of these positions. (JEL G12)

DOI
10.1093/rfs/hhx113
Volume
31 (3)
Pages
811-851
Language
en
Export
BibTeX
Sources
openalex crossref