1. LOGO 2010 National Taiwan University International Conference on Finance The Impact of Liquidity on Option Prices by San-Lin Chung and Yaw-Huei Wang (National Taiwan University) The Impact of Liquidity on Option Prices Discussant: Ruei-Shian Wu (Yuan Ze University)

2. Research Question The effects of both spot liquidity and option liquidity on pricing options. –Spot liquidity Trade-based: VOL, NT, ATS Order-based: AOI, AQS, AES –Option liquidity OVOL, OAQS, DVOL

3. Concluding Remarks Higher level of implied volatility –Options with a lower proportional bid-ask spread (the option market is less illiquid; support for the ‘illiquidity premium’ hypothesis) –Underlying stocks with a higher average proportional quoted spread (the spot asset is less liquid; consistent with Cetin et al ‘06) Liquidity of options can, at least, partly explain the implied volatility smile

4. Contribution An interesting topic Well-written Clarify the roles of spot and option liquidity in determining option prices Indicate which liquidity proxies are more informative for the pricing of options

5. Suggestion Consider the relation between spot liquidity and option liquidity –Hedge purpose: positive correlation Heavily traded stocks have greater demand to hedge by using option, generating higher option liquidity. –Arbitrage purpose: negative correlation Underlying assets and options move upward/downward together; therefore, higher spot liquidity leads to lower option liquidity. Control economic determinants –E.g., the low liquidity in the bear market year leads to high implied volatility.

6. Suggestion Sample: 30 component stocks of the Dow Jones Industrial Average Index (DJIA). –Why control implied volatility of S&P500 index option instead of that of Dow Jones index option or VIX No justification is provided on the reason for choosing the sample period covering 1 January 2001 to 31 December 2004. On top of using data from DJIA, I suggest that the authors could also use data of S&P500.

7. Suggestion Instead of stating null hypotheses, it is better to state the alternative hypotheses showing the expected possible relationship. Brief definition or explanation on certain technical terminologies could be provided to improve readability if it is necessary. –For example, author could elaborate on what is implied volatility ‘smile’. Also, since the authors link their findings to hedging costs and illiquidity premium hypothesis, stating them clearly is more readable.

8. Suggestion Other current related Literature –The Economic Value of Using Realized Volatility in Forecasting Future Implied Volatility (Chan, Jha, Kalimipalli, 2009 JFR) –Jump risk, stock returns, and slope of implied volatility smile (Yan, 2010, JFE) –Implied Volatility Anomaly, Illiquidity, and New Evidence on option Market Misreaction (Jiang, Tian, 2008, WP)

9. LOGO 2010 National Taiwan University International Conference on Finance THANK YOU !