Hostname: page-component-7c8c6479df-r7xzm Total loading time: 0 Render date: 2024-03-28T17:42:36.878Z Has data issue: false hasContentIssue false

The Intraday Behavior of Bid-Ask Spreads for NYSE Stocks and CBOE Options

Published online by Cambridge University Press:  06 April 2009

Kalok Chan
Affiliation:
College of Business, Arizona State University, Tempe, AZ 85287
Y. Peter Chung
Affiliation:
Anderson Graduate School of Management, University of California, Riverside, CA 92521.
Herb Johnson
Affiliation:
Anderson Graduate School of Management, University of California, Riverside, CA 92521.

Abstract

We study the intraday behavior of bid-ask spreads for actively traded CBOE options and for their NYSE-traded underlying stocks. We confirm previous findings that stocks have a U-shaped spread pattern; however, the options display a very different intraday pattern—one that declines sharply after the open, and then levels off. Our results suggest that both the degree of competition in market making and the extent of informed trading are important for understanding the intraday behavior of spreads.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1995

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A., and Pfleiderer, P.. “A Theory of Intraday Patterns: Volume and Price Variability.” Review of Financial Studies, 1 (1992), 340.CrossRefGoogle Scholar
Amihud, Y., and Mendelson, H.. “Dealership Market: Market-Making with Inventory.” Journal of Financial Economics, 8 (1980), 3153.CrossRefGoogle Scholar
Biais, B., and Hillion, P.. “Option Prices, Insider Trading, and Interdealer Competition.” Working Paper, INSEAD (1990).Google Scholar
Brock, W., and Kleidon, A.. “Periodic Market Closure and Trading Volume: A Model of Intraday Bids and Asks.” Journal of Economic Dynamics and Control, 16 (1992), 451489.CrossRefGoogle Scholar
Chan, K. C.; Christie, W. G.; and Schultz, P. H.. “Market Structure and the Intraday Evolution of Bid-Ask Spreads for NASDAQ Securities.” Journal of Business, 68 (1995), 3560.CrossRefGoogle Scholar
Copeland, T., and Galai, D.. “Information Effects on the Bid-Ask Spread.” Journal of Finance, 38 (1983), 14571469.Google Scholar
Easley, D., and O'Hara, M.. “Price, Trade Size and Information in Securities Markets.” Journal of Financial Economics, 19 (1987), 6990.CrossRefGoogle Scholar
Easley, D., and O'Hara, M.. “Time and the Process of Security Price Adjustment.” Journal of Finance, 47 (1992), 577605.CrossRefGoogle Scholar
Foster, F., and Viswanathan, S.. “A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets.” Review of Financial Studies, 3 (1990), 593624.CrossRefGoogle Scholar
Foster, F., and Viswanathan, S.. “Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models.” Journal of Finance, 48 (1993), 187211.CrossRefGoogle Scholar
Foster, F., and Viswanathan, S.. “Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information.” Journal of Financial and Quantitative Analysis, 29 (1994), 499518.CrossRefGoogle Scholar
George, T., and Longstaff, F.. “Bid-Ask Spreads and Trading Activity in the S&P 100 Index Options Market.” Journal of Financial and Quantitative Analysis, 28 (1993), 381397.CrossRefGoogle Scholar
Glosten, L. R., and Milgrom, P. R.. “Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.” Journal of Financial Economics, 14 (1985), 71100.CrossRefGoogle Scholar
Hansen, L.Large Sample Properties of Generalized Method of Moment Estimator.” Econometrica, 50 (1982), 10291054.CrossRefGoogle Scholar
Hasbrouck, J.Trades, Quotes, Inventories and Information.” Journal of Financial Economics, 22 (1988), 229252.CrossRefGoogle Scholar
Hasbrouck, J., and Sofianos, G.. “The Trades of Market Makers: An Empirical Analysis of NYSE Specialists.” Journal of Finance, 48 (1993), 15651593.CrossRefGoogle Scholar
Ho, T., and Macris, R. G.. “Dealer Bid-Ask Quotes and Transaction Prices: An Empirical Study of Some AMEX Options.” Journal of Finance, 39 (1984), 2345.Google Scholar
Ho, T., and Stoll, H.. “Optimal Dealer Pricing under Transactions and Return Uncertainty.” Journal of Financial Economics, 9 (1981), 4773.CrossRefGoogle Scholar
Ho, T., and Stoll, H.. “The Dynamics of Dealer Markets under Competition.” Journal of Finance, 38 (1983), 10531074.CrossRefGoogle Scholar
Jain, P., and Joh, G.. “The Dependence between Hourly Prices and Trading Volume.” Journal of Financial and Quantitative Analysis, 23 (1988), 269284.CrossRefGoogle Scholar
Jameson, M., and Wilhelm, W.. “Market Making in the Options Markets and the Costs of Discrete Hedge Rebalancing.” Journal of Finance, 47 (1992), 765779.CrossRefGoogle Scholar
John, K.; Koticha, A.; and Subrahmanyam, M.. “The Micro-Structure of Options Markets: Informed Trading, Liquidity, Volatility and Efficiency.” Working Paper, New York Univ. (1991).Google Scholar
Kleidon, A., and Werner, I.. “Round-the-Clock Trading: Evidence from U.K. Cross-Listed Securities.” Working Paper, Stanford Univ. (1993).CrossRefGoogle Scholar
Kyle, A. S.Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 13151335.CrossRefGoogle Scholar
Lee, C.; Mucklow, B.; and Ready, M.. “Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis.” Review of Financial Studies, 6 (1993), 345374.CrossRefGoogle Scholar
Lehmann, B., and Modest, D.. “Trading and Liquidity on the Tokyo Stock Exchange: A Bird's Eye View.” Journal of Finance, 49 (1994), 951984.CrossRefGoogle Scholar
Madhavan, A.Trading Mechanisms in Security Markets.” Journal of Finance, 47 (1992), 607641.CrossRefGoogle Scholar
Madhavan, A., and Smidt, S.. “An Analysis of Changes in Specialist Inventories and Quotations.” Journal of Finance, 48 (1993), 15951628.CrossRefGoogle Scholar
Mayhew, S. “Intraday Patterns in Option Market Spreads.” Working Paper, Univ. of California, Berkeley (1993).Google Scholar
McInish, T., and Wood, R.. “An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks.” Journal of Finance, 47 (1992), 753764.CrossRefGoogle Scholar
Neal, R.A Comparison of Transaction Costs between Competitive Market Maker and Specialist Market Structures.” Journal of Business, 65 (1992), 317334.CrossRefGoogle Scholar
New York Stock Exchange. NYSE Fact Book 1992 (1992).Google Scholar
Newey, W., and West, K.. “Hypothesis Testing with Efficient Method of Moments Estimation.” International Economic Review, 28 (1987), 777787.CrossRefGoogle Scholar
Stoll, H.The Supply of Dealer Services in Securities Markets.” Journal of Finance, 33 (1978), 11331151.CrossRefGoogle Scholar
Stoll, H., and Whaley, R. E.. “Stock Market Structure and Volatility.” Review of Financial Studies, 3 (1990), 3771.CrossRefGoogle Scholar
Wood, R.; McInish, T.; and Ord, J.. “An Investigation of Transactions Data for NYSE Stocks.” Journal of Finance, 40 (1985), 723739.CrossRefGoogle Scholar