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

Claudio Barbedo and Eduardo Lemgruber

No 144, Working Papers Series from Central Bank of Brazil, Research Department

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.

Date: 2007-10
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