Investors with too many options?

Daniel Dorn

No 1197, Working Paper Series from European Central Bank

Abstract: During the last decade, markets for covered warrants (bank-issued options) have flourished in Europe and Asia. In these markets, investors often face a choice between many instruments that differ only slightly from each other. Based on retail trades in call options on the German DAX index, this paper documents substantial price dispersion across securities that are close substitutes. Moreover, investors generally fail to identify attractively priced options. The results suggest that the observed product proliferation imposes a substantial search cost on investors even though the products are homogenous and their pricing is well understood. The search cost is estimated to average 1% of the amount invested, the same order of magnitude as the average spread. JEL Classification: G11, G13, D83

Keywords: investor behavior; OTC derivatives; price dispersion; search costs (search for similar items in EconPapers)
Date: 2010-05
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101197

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