Order flow,inventory risk and option returns
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F830.9

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    Abstract:

    Considering that the trading mechanism of TAIEX options (TXO) market is similar to exchange traded options markets of Mainland China,and taking into account data availability,this paper studies the impact of inventory risk on market maker’s quotation and estimates the size of the impact based on the tick-by-tick data of TXO market. Following the method proposed by Muravyev for decomposing the price impact of trades into inventory risk and asymmetric information risk components,this paper derives a new equation. Empirical results show that inventory risk component is far greater than asymmetric information risk component in TXO market. Besides,this paper also shows that inventory risk has a significant impact on option returns using the daily data. The conclusions illustrate the importance of inventory risk management to market makers.

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  • Online: October 25,2021
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