Does bid-ask spread explains the smile? On DVF and DML
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review
Author(s)
Related Research Unit(s)
Detail(s)
| Original language | English |
|---|---|
| Article number | 102645 |
| Journal / Publication | Pacific Basin Finance Journal |
| Volume | 90 |
| Online published | 19 Dec 2024 |
| Publication status | Published - Apr 2025 |
Link(s)
Abstract
In this paper, we investigate the potential effect of the bid-ask spread on pricing and implied volatilities of the newly established CSI 300 index options in China. We use the deterministic volatility function (DVF) to analyze the pricing errors and employ the double machine learning (DML) technique to evaluate the effect of liquidity costs on implied volatility in the presence of economic confounders. Our research shows that the deterministic volatility function modified to incorporate the bid-ask spread work better than the Black-Scholes model. And a sizable and statistically liquidity costs effect on implied volatility is observed in the CSI 300 options market. © 2024
Research Area(s)
- CSI 300 options, Deterministic volatility function, Double machine learning, Implied volatility, Options pricing
Citation Format(s)
Does bid-ask spread explains the smile? On DVF and DML. / Li, Pengshi; Lin, Yan; Yu, Xing et al.
In: Pacific Basin Finance Journal, Vol. 90, 102645, 04.2025.
In: Pacific Basin Finance Journal, Vol. 90, 102645, 04.2025.
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review
