An empirical study on the early exercise premium of American options: Evidence from OEX and XEO options-Reference-Cited by-同舟云学术

An empirical study on the early exercise premium of American options: Evidence from OEX and XEO options

Published:2024-04-10 Issue:7 Volume:44 Page:1117-1153
ISSN:0270-7314
Container-title:Journal of Futures Markets
language:en
Short-container-title:Journal of Futures Markets

Author:

Li Weihan¹^ORCID,Zhang Jin E.¹^ORCID,Ruan Xinfeng²^ORCID,Aschakulporn Pakorn¹^ORCID

Affiliation:

1. Department of Accountancy and Finance, Otago Business School University of Otago Dunedin New Zealand

2. Department of Finance, International Business School Suzhou Xi'an‐Jiaotong Liverpool University Suzhou China

Abstract

AbstractSince the S&P 100 Index underlies both American (OEX) and European (XEO) options, the value of the early exercise premium of American options can be directly observed. We find that the mid‐quote of an XEO option can be higher than that of an otherwise identical OEX option, and liquidity can explain this overpricing phenomenon of European options. Our results show that illiquid options are significantly overpriced in the S&P 100 Index options market. This finding indicates that an illiquid option can be overvalued with a higher market offer price, which is the requirement of market makers for compensation for providing liquidity.

Publisher

Wiley

Link

https://onlinelibrary.wiley.com/doi/pdf/10.1002/fut.22508

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