Liquidity Premium In Equity Option Market Of China

Liquidity reflects the ability of assets to be converted to cash,and liquidity premium reflects the relationship between transaction costs and asset prices.Domestic and foreign scholars have conducted a lot of research on the liquidity premium of various assets such as stocks and bonds in different trading places and the internal reasons,and the conclusions are not consistent.China’s equity option market started late,with only ETF options and index options on the market.However,in recent years,its scale has expanded rapidly.Many domestic and foreign scholars and investors have paid high attention to whether there is a liquidity premium in equity option market of China.This paper uses high-frequency trading data of SSE 50 ETF options and CSI 300 ETF options traded in Shanghai Stock Exchange for empirical research and analysis.Based on the classification of option moneyness,the effective bid-ask spread is used as the liquidity variable to test whether there is a correlation between the expected hedging return of options and liquidity,and to explore the internal components of liquidity.The empirical results of this paper are as follows:(1)There is a significant liquidity premium in all Moneyness categories of SSE 50 ETF options and OTM Put and ATM Put categories of CSI 300 ETF options markets;(2)In China’s stock option market,the effective bid-ask spread is not necessarily an increasing function of the hedging and inventory costs of market makers,indicating that there is still a large lack of market maker rules and pricing ability of market makers;(3)For all categories of SSE 50 ETF options and CSI 300 ETF options OTM Put and ATM Put,the more unbalanced the supply and demand of options,the more serious the imbalance between supply and demand in the market,and the worse the liquidity of options;(4)After controlling some quantifiable influencing factors of the effective spread,the effective spread of all categories of SSE 50 ETF options and OTM Put and ATM Put categories of CSI 300 ETF options still has a significant positive impact on the expected hedged return,indicating that the effective spread also contains a large amount of additional information about the liquidity needs of investors,option market making costs and risks;(5)The COVID significantly weakened the liquidity of China’s stock option market,and had a significant negative impact on the liquidity’s effect on expected income of the SSE 50 ETF call option market,indicating that the liquidity microstructure and market efficiency had changed in the face of sudden exogenous shocks.This paper innovatively uses high-frequency trading data of China’s equity option market to study the liquidity premium,excavates the market microstructure that leads to the liquidity premium phenomenon,and supplements the existing literature to provide reference for the subsequent introduction of individual stock options.Based on the empirical results of this paper,the equity option investors should take the liquidity into consideration when constructing the option portfolio and adjust the expected hedging income;Market makers should strengthen their ability to quote,pay attention to holding costs and risks,and maintain market liquidity;Policymakers should evaluate the effect of regulation and related policy implementation through their contribution to market liquidity.