Liquidity and Efficiency in Three Related Foreign Exchange Options Markets

42 Pages Posted: 17 Jan 2007

See all articles by Menachem Brenner

Menachem Brenner

New York University (NYU) - Department of Finance

Ben Z. Schreiber

Bank of Israel; Bar Ilan University

Multiple version iconThere are 2 versions of this paper

Date Written: December 28, 2006

Abstract

The 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. In this paper we explore the liquidity and efficiency in three related foreign exchange options markets and the information content of the instruments traded in these markets. The unique data set on OTC trading and the central bank auctions, in addition to the exchange traded options provide us with insights about the operation of these markets, their relative efficiency, their information content and their interrelationship. An important aspect is the effect of liquidity on the pricing of options in these markets. As expected, we find that, except for extreme cases, liquidity does not affect options prices.

Keywords: Foreign Exchange, Implied Volatility, Liquidity, Bid-Ask Spread

JEL Classification: F31, G13, G14

Suggested Citation

Brenner, Menachem and Schreiber, Ben Z., Liquidity and Efficiency in Three Related Foreign Exchange Options Markets (December 28, 2006). Available at SSRN: https://ssrn.com/abstract=957640 or http://dx.doi.org/10.2139/ssrn.957640

Menachem Brenner (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0323 (Phone)
212-995-4233 (Fax)

Ben Z. Schreiber

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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