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Transaction Cost Discovery By Decomposition Of The Error Term: A Bootstrapping Approach

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  • Ariful Hoque

Abstract

There is agreement regarding the fundamental role of transaction costs in determining currency options market efficiency. However, the estimation of transaction costs in this relationship is controversial. In this study, a bootstrapping approach is adapted to decompose the error term of the put-call parity regression analysis in order to estimate transaction costs. The currency option market is more than 95 percent efficient with the estimated transaction costs. This robust transaction cost calculation will be valuable to traders and researchers as it eliminates dependence on crude proxies for transaction costs.

Suggested Citation

  • Ariful Hoque, 2011. "Transaction Cost Discovery By Decomposition Of The Error Term: A Bootstrapping Approach," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 5(1), pages 113-121.
    • Handle: RePEc:ibf:ijbfre:v:5:y:2011:i:1:p:113-121
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    References listed on IDEAS

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    More about this item

    Keywords

    Transaction costs; error term decomposition; put-call parity; serial correlation; ARCH;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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