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| Author: | Amaro de Matos, J. Antao, P. |
| Title: | Market illiquidity and bounds on European option prices |
| Journal: | European Journal of Finance
2003 : OCT, VOL. 9:5, p. 475-498 |
| Index terms: | Stock markets Options Pricing Europe |
| Freeterms: | Illiquidity Dividends Smile effect |
| Language: | eng |
| Abstract: | The authors analyse the impact of illiquidity of a sock paying no dividends on the pricing of European options written on that stock. In particular, it is shown how illiquidity generates price bounds on an option on this stock, even in the absence of other imperfections, such as transaction costs and trading constraints, or the assumption of stochastic volatility. Moreover, price bounds are shown to be asymmetric with respect to the option price under perfect liquidity. The fact explains, under some conditions, the appearance of a smile effect when the implied volatility is estimated from the mid-quote. |
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