Liquidity Risk in Option Pricing --- Evidence from Taiwan Stock Index Options

• Main Authors: Wen-Ling, Shen, 沈文玲
• Other Authors: Yih-Wen, Shyu
• Format: Others
• Language: zh-TW
• Published: 2004
• Online Access: http://ndltd.ncl.edu.tw/handle/97924320432209697516

碩士 === 長庚大學 === 企業管理研究所 === 93 === Abstract The purpose of this study is to analyze the pricing option after taking liquidity risk for consideration, and compare with Black-Scholes (1973) model to see if the revised prices are better. Based on Black-Scholes model, the liquidity of underlying asset and liquidity of option are added into funtion to find out a closed-form solution by Finite Difference Approach in numerical analysis. This study uses TXO as target assets and finds out that the revised liquidity model gets the best result under variant moneyness classes through empirical research. The error of revised liquidity model decreases gradually from the region of out-of-the-money, at-the-money to in-the-money contract. This study also separates the nearby and distant contracts to analyze if the maturity period influences the pricing of the revised model. According to the empirical inference, when the option under the nearby contract, the pricing of revised liquidity model is better on the contract of at the money and in the money, when the option under the distant contract, the revised liquidity model shows better approach on out of the money option. Finally, this study focuses on the property of symmetry between liquidity and moneyness. The result is that the maximum liquidity occurs near the contract of at-the-money slanting to the side of out-of-the-money, and the liquidity drops gradually to both sides. There is no symmetry between in-the-money option and out-of-money option. It results from the high investment cost and volatility of deep-in-the-money option and deep-out-of -the-money option. Generally, investors have no willing to share the huge risk, so the liquidity is low on the financial market.