Are Options Redundant? Further Evidence from Currency Futures Markets

23 Pages Posted: 27 May 2002

See all articles by Leo H. Chan

Leo H. Chan

Woodbury School of Business, Utah Valley University

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

Date Written: March 2002

Abstract

This paper investigates the impact of the introduction of options on the underlying asset's price formation process, using Geweke feedback measures. We derive the feedback measures from the Deutsche Mark, British Pound, Swiss Franc, Japanese Yen and Canadian Dollar futures and spot prices, before and after the introduction of options for these currency futures. While each currency market maintains some distinct characteristics in the post-option period, a common theme is found: after the option introduction, the instantaneous feedback between spot and futures markets improves drastically. The feedback from the spot to the futures market tends to decrease and remains small. The feedback from the futures market to the spot market tends to decrease as well. These results confirm the dominance of options markets, probably due to their smaller transaction costs. When made available, options assume a leading role for information transmission in currency markets.

Keywords: Currency futures options, Geweke measures, Market efficiency

JEL Classification: G14, C32, G15

Suggested Citation

Chan, Leo H. and Lien, Donald, Are Options Redundant? Further Evidence from Currency Futures Markets (March 2002). Available at SSRN: https://ssrn.com/abstract=311385 or http://dx.doi.org/10.2139/ssrn.311385

Leo H. Chan (Contact Author)

Woodbury School of Business, Utah Valley University ( email )

Department of Finance and Economics
800 West University Parkway
Orem, UT 84058
United States
801-863-8428 (Phone)

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

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