The determinants of the bid-ask spread in the option mar

Abstract

We study the relationship between the proportional bid-ask spread (PBA) with different time to expiration and moneyness for Standard & Poor index options. We first test the non-linear relationship between the PBA and moneyness by using a polynomial regression model, where we find this to be asymmetrical. Thereafter, we examine the relationship between the PBA and time to expiration with a linear regression model, where we conclude that there is a negative relationship. We observe that these relationships still hold when controlling for the inventory holding- and order processing cost from the spread function of Stoll (1978b).