The Price of Options Illiquidity
AbstractThe purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique dataset that allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange. We find that the nontradable options are priced about 21 percent less than the exchange-traded options. This gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process. Copyright The American Finance Association 2001.
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Bibliographic InfoArticle provided by American Finance Association in its journal The Journal of Finance.
Volume (Year): 56 (2001)
Issue (Month): 2 (04)
Other versions of this item:
- Menachem Brenner & Rafi Eldor & Shmuel Hauser, 1999. "The Price of Options Illiquidity," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-086, New York University, Leonard N. Stern School of Business-.
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