The Price of Options Illiquidity

18 Pages Posted: 1 Jan 2014

See all articles by Menachem Brenner

Menachem Brenner

New York University (NYU) - Department of Finance

Rafi (Rafael) Eldor

Interdisciplinary Center (IDC) Herzliya - Arison School of Business

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management; Government of the State of Israel - Israel Securities Authority

Multiple version iconThere are 2 versions of this paper

Date Written: April 2001

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 non-tradable 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.

Keywords: Options, Liquidity, Non-tradable

JEL Classification: G12, G14, D23

Suggested Citation

Brenner, Menachem and Eldor, Rafi (Rafael) and Hauser, Shmuel, The Price of Options Illiquidity (April 2001). Journal of Finance, Vol. 56, No. 2, 2001, Available at SSRN: https://ssrn.com/abstract=2373449

Menachem Brenner

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States
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Rafi (Rafael) Eldor (Contact Author)

Interdisciplinary Center (IDC) Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-952-7234 (Phone)
972-9-956-3616 (Fax)

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management ( email )

P.O. Box 653
Beer-Sheva 84105
Israel
+972 2 651 3939 (Phone)
+972 7 6472896 (Fax)

Government of the State of Israel - Israel Securities Authority

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Jerusalem 95464
Israel

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