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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

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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

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