Job Market Paper

Abstract: Options markets are generally very thinly traded, with a significant percentage of contracts having zero trading volume across different strikes and maturities. When trading volume is zero, the Chicago Mercantile Exchange (CME) manually settles the option prices. This study evaluates the accuracy of option prices settled with zero volume and examines its implications for the Black-Scholes (BS) option pricing model. Our empirical analysis focuses on selected agricultural commodities, using end-of-day options chain data from 2005 to 2022. The results indicate that when trades occur after one or more days of zero volume (i.e., when the market receives initial information from actual trades), the price moves substantially. This suggests that options settled with zero volume may not effectively reflect the market's sentiment and expectations regarding future prices. Therefore, the informational content—and thus the validity—of prices settled with zero volume can be questioned. We also observe that higher implied volatilities are often found for options far into or out of the money, which contradicts the distributional assumptions of the BS model. Notably, such violations are mostly observed for options with zero trading volume. Our findings demonstrate that limited trading volume may have significant implications for the validity of the BS model.


Working Paper

Abstract: This paper develops semiparametric single-index threshold models to investigate spatial market integration. We consider two forcing variables: the lagged price differentials and the ratio of oil to corn prices. We apply our models to two contexts: the US corn markets and the international corn markets. Specifically, the first application is to eight principal corn markets in the US using monthly data from 1975 to 2022. The second application is to major exporting countries—Argentina, Ukraine, and the US—using weekly data from 2008 to 2022. We confirm strong market integration and the presence of thresholds in both applications. The results of the single index models are consistent with efficiently linked markets, although rising fuel prices increase transaction costs and serve to inhibit spatial trade. The results of the applications support the importance of fuel prices in determining the likelihood of equilibrating price adjustments. This study contributes to the literature by introducing flexible threshold models and including relative oil prices as a forcing variable to better reflect actual transaction costs.


Work in Progress


Publication