Take the 2-minute tour ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

How does one calculate the implied liquidity of a specific option contract given a set of vanilla puts and calls with various strikes and maturities on a single underlying?

share|improve this question

1 Answer 1

From Implied Liquidity : Towards stochastic liquidity modeling and liquidity trading

We will call the parameter, fitting the bid-ask spread (under a symmetric distortion) around the mid price, the implied liquidity parameter. Hence for the European Call option (strike K and maturity T ) with given market bid (b) and ask (a) prices, the implied liquidity parameter is the specific λ > 0, such that:

a = − exp(−rT )Eλ [−(ST − K )+ ] and b = exp(−rT )Eλ [(ST − K )+ ]

share|improve this answer

Your Answer


By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.