No. 730: Jumps in Option Prices and Their Determinants: Real-time Evidence from the E-mini S&P 500 Option Market
George Kapetanios Queen Mary University of London Michael Neumann Queen Mary University of London George Skiadopoulos Queen Mary University of London University of Piraeus
October 27, 2014
Abstract
We study the real-time characteristics and drivers of jumps in option prices. To this end, we employ high frequency data from the 24-hour E-mini S&P 500 options market. We find that option prices do not jump simultaneously across strikes and maturities and are uncorrelated with jumps in the underlying futures price. 14% to 28% of detected option price jumps occur around scheduled news releases. However, it is illiquidity rather than the news content that drives jumps. Evidence suggests that option traders increase bid-ask spreads to account for trading against investors who are skilled processors of public releases.
J.E.L classification codes: C58, G10, G12, G13
Keywords: Asymmetric information, Co-jumps, Limit order markets, Liquidity, Option Markets, News announcements