Does bid-ask spread explains the smile? On DVF and DML

IF 4.8 2区经济学 Q1 BUSINESS, FINANCE

Pacific-Basin Finance Journal Pub Date : 2024-12-19 DOI:10.1016/j.pacfin.2024.102645

Pengshi Li , Yan Lin , Xing Yu , Guifang Liu

引用次数: 0

Abstract

In this paper, we investigate the potential effect of the bid-ask spread on pricing and implied volatilities of the newly established CSI 300 index options in China. We use the deterministic volatility function (DVF) to analyze the pricing errors and employ the double machine learning (DML) technique to evaluate the effect of liquidity costs on implied volatility in the presence of economic confounders. Our research shows that the deterministic volatility function modified to incorporate the bid-ask spread work better than the Black-Scholes model. And a sizable and statistically liquidity costs effect on implied volatility is observed in the CSI 300 options market.

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来源期刊

Pacific-Basin Finance Journal BUSINESS, FINANCE-

CiteScore

6.80

自引率

6.50%

发文量

157

期刊介绍： The Pacific-Basin Finance Journal is aimed at providing a specialized forum for the publication of academic research on capital markets of the Asia-Pacific countries. Primary emphasis will be placed on the highest quality empirical and theoretical research in the following areas: • Market Micro-structure; • Investment and Portfolio Management; • Theories of Market Equilibrium; • Valuation of Financial and Real Assets; • Behavior of Asset Prices in Financial Sectors; • Normative Theory of Financial Management; • Capital Markets of Development; • Market Mechanisms.