The square-root impact law also holds for option markets

TL;DR

This paper demonstrates that the square-root impact law, previously observed in stocks and futures, also applies to option markets, suggesting a universal market impact mechanism across different asset classes.

Contribution

It provides empirical evidence that the square-root impact law holds in option markets, extending the universality of this market impact model.

Findings

Square-root impact law applies to option markets

Supports the universality of market impact mechanisms

Analyzed large proprietary option trade dataset

Abstract

Many independent studies on stocks and futures contracts have established that market impact is proportional to the square-root of the executed volume. Is market impact quantitatively similar for option markets as well? In order to answer this question, we have analyzed the impact of a large proprietary data set of option trades. We find that the square-root law indeed holds in that case. This finding supports the argument for a universal underlying mechanism.