The Price of Options Illiquidity

Menachem Brenner, Rafi Eldor and Shmuel Hauser ()

New York University, Leonard N. Stern School Finance Department Working Paper Seires from New York University, Leonard N. Stern School of Business-

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.

Date: 1999-09
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Journal Article: The Price of Options Illiquidity (2001)
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Persistent link: http://EconPapers.repec.org/RePEc:fth:nystfi:99-086

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