What do we know about individual equity options?

This paper examines the empirical literature on individual equity options, discussing results in areas of consensus, showing findings in areas of disagreement and providing a guide for future research (especially highlighting analyses that cannot be performed with index options). Key topics include the impact of equity option listings on the underlying stock market, option market efficiency, anomalies in equity option returns, option market microstructure, investors' behavioural biases, option price discovery and private information revealed in equity option markets. Some directions for future research include the determinants of equity option returns and the effect of algorithmic trading in option markets

The Impact of new Execution Venues on European Equity Markets’ Liquidity – The Case of Chi-X

With the Markets in Financial Instruments Directive in effect since November 2007, new trading venues have emerged in European equities trading, among them Chi-X. This paper analyzes the impact of this new market entrant on the home market as well as on consolidated liquidity of French blue chip equities, newly tradable on Chi-X. Our findings suggest that owing to this new competition the home market’s liquidity has enhanced. This is apparently due to the battle for order flow which results in narrower spreads and increased market depth. These results imply that overall liquidity in a virtually consolidated order book is in the French case higher than without the new competitor

The Mars Science Laboratory record of optical depth measurements via solar imaging

The Mars Science Laboratory Curiosity rover has monitored the Martian environment in Gale crater since landing in 2012. This study reports the record of optical depth derived from visible and near-infrared images of the Sun. Aerosol optical depth, which is mostly due to dust but also includes ice, dominates the record, with gas optical depth too small to measure. The optical depth record includes the effects of regional dust storms and one planet-encircling dust event, showing the expected peaks during southern spring and summer and relatively lower and more stable optical depth in fall and winter. The measurements show that there is a seasonally varying diurnal change in dust load, with the optical depth peaking in the morning during southern spring and summer, correlated with thermotidal pressure changes. However, there was no systematic diurnal change during autumn and winter, except after one regional storm. There were indications that the dust was relatively enhanced at high altitudes during high-optical-depth periods and that high-altitude ice was significant during winter. The observations did not provide much information about particle size or composition, but they were consistent with a smaller particle size after aphelion (in southern winter). No scattering halos were seen in associated sky images, even when there was visual evidence of ice hazes or clouds, which suggests small or amorphous ice particles. Unexpectedly, the measurement campaign revealed that the cameras collected saltating sand in their sunshades 1.97 m above the surface. As a result, the measurement strategy had to be adjusted to avoid high-elevation imaging to avoid sand covering the optics

Arbitrage opportunities in CDS term structure: theory and implications for OTC derivatives

Absence-of-Arbitrage (AoA) is the basic assumption underpinning derivatives pricing theory. As part of the OTC derivatives market, the CDS market not only provides a vehicle for participants to hedge and speculate on the default risks of corporate and sovereign entities, it also reveals important market-implied default-risk information concerning the counterparties with which financial institutions trade, and for which these financial institutions have to calculate various valuation adjustments (collectively referred to as XVA) as part of their pricing and risk management of OTC derivatives, to account for counterparty default risks. In this study, we derive No-arbitrage conditions for CDS term structures, first in a positive interest rate environment and then in an arbitrary one. Using an extensive CDS dataset which covers the 2007-09 financial crisis, we present a catalogue of 2,416 pairs of anomalous CDS contracts which violate the above conditions. Finally, we show in an example that such anomalies in the CDS term structure can lead to persistent arbitrage profits and to nonsensical default probabilities. The paper is a first systematic study on CDS-term-structure arbitrage providing model-free AoA conditions supported by ample empirical evidence

Going Green: Framing Effects in a Dynamic Coordination Game

We experimentally study decision-making in a novel dynamic coordination game. The game captures features of a transition between externality networks. Groups consisting of three subjects start in a stable benchmark equilibrium with network externality. Over seven rounds, they can transit to an alternative stable equilibrium based on the other network. The alternative network has higher payoffs, but the transition is slow and costly. Coordination is required to implement the transition while minimizing costs. In the experiment, the game is repeated five times, which enables groups to learn to coordinate over time. We compare a neutral language treatment with a ‘green framing’ treatment, in which meaningful context is added to the instructions. We find the green framing to significantly increase the number of profitable transitions, but also to inhibit the learning from past experiences, and thus it reduces coherence of strategies. Consequently, payoffs in both treatments are similar even though the green framing results in twice as many transitions. In the context of environmental policy, the experiment suggests general support for ‘going green’, but we also find evidence for anchoring of beliefs by green framing; proponents and opponents stick to their initial strategies

Minimally Acceptable Altruism and the Ultimatum Game

I suppose that people react with anger when others show themselves not to be minimally altruistic. With heterogeneous agents, this can account for the experimental results of ultimatum and dictator games. Moreover, it can account for the surprisingly large fraction of individuals who offer an even split, with parameter values that are more plausible than those required to explain outcomes in these experiments with the models of Levine (1998), Fehr and Schmidt (1999), Dickinson (2000), and Bolton and Ockenfels (2000)