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Clustering of Trading Activity in the DAX Index Options Market

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Author Info
Alexander K. Koch () (Department of Economics, Royal Holloway, University of London)
Zdravetz Lazarov (Bonn Graduate School of Economics, University of Bonn)

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Abstract

A common contention is that more liquid financial contracts draw trading volume from contracts for which they are close substitutes. This paper tests this hypothesis by analyzing clustering of trading activity in DAX index options. Contracts with identical maturities cluster around particular classes of strike prices. For example, options with strikes ending on 50 are less traded than options with strikes ending on 00. The degree of substitution between options with neighboring strikes depends on the strike price grid and options’ characteristics. Our empirical analysis finds a positive relation between clustering and substitutiability between option contracts, providing support to the initial hypothesis.

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Publisher Info
Paper provided by Department of Economics, Royal Holloway University of London in its series Royal Holloway, University of London: Discussion Papers in Economics with number 05/02.

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Length: 35 pages
Date of creation: Mar 2005
Date of revision: Mar 2005
Handle: RePEc:hol:holodi:0502

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Related research
Keywords: Clustering; Incidental Truncation; Index Options; Volume.;

Other versions of this item:

Find related papers by JEL classification:
C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
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  2. Economides, Nicholas & Siow, Aloysius, 1988. "The Division of Markets is Limited by the Extent of Liquidity (Spatial Competition with Externalities)," American Economic Review, American Economic Association, vol. 78(1), pages 108-21, March. [Downloadable!] (restricted)
  3. Grossman, Sanford J, et al, 1997. "Clustering and Competition in Asset Markets," Journal of Law & Economics, University of Chicago Press, vol. 40(1), pages 23-60, April.
  4. George, Thomas J. & Longstaff, Francis A., 1993. "Bid-Ask Spreads and Trading Activity in the S&P 100 Index Options Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(03), pages 381-397, September. [Downloadable!]
  5. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January. [Downloadable!] (restricted)
  6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  7. Cuny, Charles J, 1993. "The Role of Liquidity in Futures Market Innovations," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(1), pages 57-78. [Downloadable!] (restricted)
  8. Harris, Lawrence, 1991. "Stock Price Clustering and Discreteness," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(3), pages 389-415. [Downloadable!] (restricted)
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