The price of options illiquidity

Menachem Brenner, Rafi Eldor, Shmuel Hauser

Research output: Contribution to journalArticlepeer-review

57 Scopus citations

Abstract

The 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.

Original languageEnglish
Pages (from-to)789-805
Number of pages17
JournalJournal of Finance
Volume56
Issue number2
DOIs
StatePublished - 1 Jan 2001

Fingerprint

Dive into the research topics of 'The price of options illiquidity'. Together they form a unique fingerprint.

Cite this