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The Effect of Bid-Ask Prices on Brazilian Options Implied Volatility: A Case Study of Telemar Call Options

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Author Info
Claudio Henrique da Silveira Barbedo
Eduardo Facó Lemgruber
Abstract

Although not explicitly reported, option traders on the Bovespa exchange pay an implicit bid-ask spread on each trade. Reported transaction prices that comprise the databases previously used to study the Brazilian options markets do not reflect actual option values at the time of the trades, but actual values plus (for purchases) or minus (for sales) the bid-ask spread. We use a chooser American option model to estimate Telemar call options bid-ask spreads, and to create a database of spread-adjusted trade prices. We find that the bid-ask spreads explain several previously reported puzzles regarding asset price volatility.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps144.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 144.

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Date of creation: Oct 2007
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Handle: RePEc:bcb:wpaper:144

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Web page: http://www.bcb.gov.br/?english

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Eduardo J. A. Lima & Felipe Luduvice & Benjamin M. Tabak, 2006. "Forecasting Interest Rates: an application for Brazil," Working Papers Series 120, Central Bank of Brazil, Research Department. [Downloadable!]
  2. Victorio Y. T. Chu & Márcio I. Nakane, 2001. "Credit Channel without the LM Curve," Working Papers Series 20, Central Bank of Brazil, Research Department. [Downloadable!]
  3. Mirta Noemí Sataka Bugarin & Roberto de Goes Ellery Jr. & Victor Gomes Silva & Marcelo Kfoury Muinhos, 2005. "Steady State Analysis of an Open Economy General Equilibrium Model for Brazil," Working Papers Series 92, Central Bank of Brazil, Research Department. [Downloadable!]
  4. Theodore M. Barnhill & Marcos R. Souto & Benjamin M. Tabak, 2006. "An Analysis of Off-Site Supervision of Banks' Profitability, Risk and Capital Adequacy: a portfolio simulation approach applied to brazilian banks," Working Papers Series 117, Central Bank of Brazil, Research Department. [Downloadable!]
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