A maximum (non-extensive) entropy approach to equity options bid-ask spread

The cross-section of options bid-ask spreads with their strikes are modelled by maximising the Kaniadakis entropy. A theoretical model results with the bid-ask spread depending explicitly on the implied volatility; the probability of expiring at-the-money and an asymmetric information parameter (kappa). Considering AIG as a test case for the period between January 2006 and October 2008, we find that information flows uniquely from the trading activity in the underlying asset to its derivatives. Suggesting that kappa is possibly an option implied measure of the current state of trading liquidity in the underlying asset. (C) 2013 Elsevier B.V. All rights reserved.