This paper attempts to discover the macroeconomic
determinants of liquidity in option
markets, which is measured by the open interest, the volume (number of
transactions), the implied volatility and the bid-ask spread. The macroeconomic determinants of each
European economy employed in this study are 1) the gross domestic product, the gross domestic
product per capita, the unemployment rate, the income tax rate, the corporate
tax rate, the population, the bank capital-to-assets ratio, the inflation, the
10-year government bond yield rate,2) the
market capitalization (of listed domestic companies), the Standard & Poor’s
global equity indices (annual % change), the stocks traded (turnover ratio of
domestic shares (%) and total value), which show the breadth of a country’s
capital markets, as well as 3) indices
like the economic freedom, the freedom from corruption, the fiscal freedom, the
business freedom, the investment freedom, the financial freedom. Panel data
linear regressions are performed to find evidence that the liquidity of the
option markets is mainly affected by macroeconomic and capital market
determinants, whereas the economic freedom indicators play a less significant
role. The findings can be of use to the policymakers and option market
authorities who wish to increase the liquidity of these markets. The novelties
introduced by this study are the consideration of macroeconomic variables as
determinants of option market liquidity and the subsequent use of these
determinants in order to make policy recommendations.
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