Abstract
AbstractThis paper develops a cross‐market model to extend Huang and Stoll (1997) by utilizing information from trade flows in the options market. Empirical tests reveal a significant increase in the estimated adverse information component, which stays consistent irrespective of the degree of option leverage. Further, intraday variation in stock bid‐ask spread components is affected by the stock trade size and the extent of imbalance in information‐based option trades. Including the options market information in decomposition of the stock bid‐ask spread enhances the quality of its estimation.
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