IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v7y2001i3p351-374.html
   My bibliography  Save this article

Smiles, Bid‐ask Spreads and Option Pricing

Author

Listed:
  • Ignacio Peña
  • Gonzalo Rubio
  • Gregorio Serna

Abstract

Given the evidence provided by Longstaff (1995), and Peña, Rubio and Serna (1999) a serious candidate to explain the pronounced pattern of volatility estimates across exercise prices might be related to liquidity costs. Using all calls and puts transacted between 16:00 and 16:45 on the Spanish IBEX‐35 index futures from January 1994 to October 1998 we extend previous papers to study the influence of liquidity costs, as proxied by the relative bid‐ask spread, on the pricing of options. Surprisingly, alternative parametric option pricing models incorporating the bid‐ask spread seem to perform poorly relative to Black‐Scholes.

Suggested Citation

  • Ignacio Peña & Gonzalo Rubio & Gregorio Serna, 2001. "Smiles, Bid‐ask Spreads and Option Pricing," European Financial Management, European Financial Management Association, vol. 7(3), pages 351-374, September.
    • Handle: RePEc:bla:eufman:v:7:y:2001:i:3:p:351-374
    DOI: 10.1111/1468-036X.00160
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1468-036X.00160
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1468-036X.00160?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Panayiotis Andreou & Chris Charalambous & Spiros Martzoukos, 2014. "Assessing the performance of symmetric and asymmetric implied volatility functions," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 373-397, April.
    2. Rubio Irigoyen, Gonzalo & Ferreira García, María Eva & Gago, Mónica & León, Angel, 2002. "An empirical comparison of the performance of alternative option pricing models," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    3. Li, Pengshi & Xian, Aichuan & Lin, Yan, 2021. "What determines volatility smile in China?," Economic Modelling, Elsevier, vol. 96(C), pages 326-335.
    4. Energy Sonono, Masimba & Phillip Mashele, Hopolang, 2016. "Estimation of bid-ask prices for options on LIBOR based instruments," Finance Research Letters, Elsevier, vol. 19(C), pages 33-41.
    5. F. Leung & M. Law & S. K. Djeng, 2024. "Deterministic modelling of implied volatility in cryptocurrency options with underlying multiple resolution momentum indicator and non-linear machine learning regression algorithm," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-25, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:7:y:2001:i:3:p:351-374. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efmaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.