Embedded Insights from an OTC FX Options Market: Key Players, Investment Strategies and Their Impact on Bid-Ask Spreads and Implied Volatilities

37 Pages Posted: 7 Oct 2008

See all articles by Dan Galai

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Ben Z. Schreiber

Bank of Israel; Bar Ilan University

Date Written: October 5, 2008

Abstract

This study proposes a more robust estimation of the implied volatility in the FX market, offers a possible explanation to the observed "smile" in implied volatilities based on a "clientele effect", and tests the predictability of future volatilities in the FX market. We employ detailed data on OTC foreign exchange options trading that enable us to examine the behavior of the key players (financial companies, non-financial firms, households and foreign investors) and the investment strategies (straddles, strangles, reversals, synthetic futures, naked calls, and naked puts) used during relatively turbulent and tranquil periods.

Keywords: bid-ask spreads, implied volatility, currency options, markets micro-structure

JEL Classification: F31, G13, G14

Suggested Citation

Galai, Dan and Schreiber, Ben Z., Embedded Insights from an OTC FX Options Market: Key Players, Investment Strategies and Their Impact on Bid-Ask Spreads and Implied Volatilities (October 5, 2008). Available at SSRN: https://ssrn.com/abstract=1279168 or http://dx.doi.org/10.2139/ssrn.1279168

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 5883235 (Phone)
972 2 5881341 (Fax)

Ben Z. Schreiber (Contact Author)

Bank of Israel ( email )

P.O. Box 780
Jerusalem 91007
Israel
972-2-6552595 (Phone)
972-2-6512026 (Fax)

Bar Ilan University ( email )

Ramat Gan, 55000
Israel

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