Associate Professor of Finance, Graduate School of Business Administration, New York University, and Smith Barney, Harris Upham & Co. Inc., respectively. The authors would like to thank David Cohen of Cohen, Cohen, and Duffy for his assistance in helping the authors understand the function of an options specialist. They would also like to thank John Merrick, Anthony Saunders, Hans Stoll, and Seha Tinic, the referee, for their comments on the paper, and Neil Horrell for his computing assistance. We are responsible for the remaining errors.
Dealer Bid-Ask Quotes and Transaction Prices: An Empirical Study of Some AMEX Options
Article first published online: 30 APR 2012
1984 The American Finance Association
The Journal of Finance
Volume 39, Issue 1, pages 23–45, March 1984
How to Cite
HO, T. S. Y. and MACRIS, R. G. (1984), Dealer Bid-Ask Quotes and Transaction Prices: An Empirical Study of Some AMEX Options. The Journal of Finance, 39: 23–45. doi: 10.1111/j.1540-6261.1984.tb03858.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper, utilizing dealer's “trading book” information, presents some empirical evidence supporting the validity of a dealer pricing model. It shows that much of the transaction prices variation may be explained by the specialist's optimal determination of his bid and ask quotes. Furthermore, it demonstrates that the dealer's bid-ask spread is an important explanatory variable in the observed transaction return. Finally, it indicates that the dealer's inventory level may affect his quotes and thus the transaction prices and order arrivals. The paper provides insights into the relationship between transaction prices and equilibrium prices, which will permit more extensive use of transaction data in empirical investigations. It also provides a better understanding of optimal dealer pricing strategies, suggesting that the proposed empirical model may be used to evaluate a dealer's trading performance.