LIQUIDITY AND EFFICIENCY IN THREE RELATED FOREIGN EXCHANGE OPTIONS MARKETS

Menachem Brenner and Ben Schreiber
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Menachem Brenner: Stern School of Business, New York University, USA

Chapter 5 in Managing and Measuring Risk:Emerging Global Standards and Regulations After the Financial Crisis, 2013, pp 125-158 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe foreign currency market in a small open economy, like Israel, plays a major role in fiscal and monetary policy decisions, through its effects on the financial markets and the real economy. This has become even more evident in the recent financial crisis. In this paper we explore the relationship among three related foreign exchange options markets. The unique data set on OTC trading, on central bank options' auctions, in addition to the exchange traded ones provide us with insights about: (a) the effect of different financial infra-structures on prices, on limits to arbitrage, on their information content (forecasting volatility) and on the interrelationship between illiquidity and volatility, (b) the micro- structure interrelatedness between the FX spot market and the FX options market.

Keywords: Risk Management; Sovereign Risk; Systemic Risk; Liquidity; Credit Risk; Equity Risk Premium; Enterprise Risk Management (search for similar items in EconPapers)
Date: 2013
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