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The Price of Options Illiquidity

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  • Menachem Brenner
  • Rafi Eldor
  • Shmuel Hauser

Abstract

The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique data set which 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 non-tradable options are priced about 21% less than the exchange traded options. It is an anomaly that cannot be explained by non-hedgeable risks like jumps in the prices of the liquid options which we use in replicating the payoffs of the illiquid options.

Suggested Citation

  • 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-.
  • Handle: RePEc:fth:nystfi:99-086
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