Two Essays on Option Market Microstructure Open Access
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In these essays I investigate the functions of the market maker in natural gas futures options and futures markets, while decomposing their intraday inventory risk holdings as measured by delta and vega. The premise that market makers in futures options markets mitigate their exposure to volatility risk while allowing their exposure to changes in the underlying price is examined. Intraday, transactions data is utilized which allows for the examination of the type and frequency of trading. Further, the amount of price discovery occurring in the futures options market is evaluated using Hasbrouck's (1995) information share approach. The implied futures price is found from a two stage estimation procedure. Price discovery is examined across various levels of moneyness and option type.