Effective Bid-Ask Spreads in Futures versus Futures Options
Abstract
While considerable research has estimated liquidity costs of futures trading, little comparable research is available about options markets. This study determines effective bid-ask spreads in options and futures markets for Kansas City Board of Trade (KCBT) wheat. Effective bid-ask spreads are estimates of the actual liquidity cost of a round-trip order. Option liquidity costs are estimated using a new measure of effective spreads developed for options markets. Futures effective spreads are estimated using eight different measures developed in previous studies. Estimated effective bid-ask spreads of options contracts are at least double the effective bid-ask spreads of open-outcry futures contracts.
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Citation
Shah, Samarth; Brorsen, B. Wade; Anderson, Kim B., Effective Bid-Ask Spreads in Futures versus Futures Options, Journal of Agricultural and Resource Economics, Volume 37, Issue 3, December 2012, Pages 455-468
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