Bid-ask spreads and implied volatilities of key players in a FX options market

Dan Galai, Ben Z. Schreiber

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4 Scopus citations

Abstract

This study proposes a simultaneous estimation of the bid-ask spreads (BAS) and implied volatility (IV), based on trading options of various key players in the Israeli OTC FX options market. It explores the surface shape of both variables based on a "clientele effect." 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) during relatively turbulent and tranquil periods. Using simultaneous unbiased estimates of BAS and IV, we find substantial differences in BASs among key players while insignificant differences in IV. This evidence reflects differences in key players' profile such as trading size, sophistication and contestability on one hand and a "no arbitrage opportunities" of IV on the other hand.

Original languageEnglish
Pages (from-to)774-794
Number of pages21
JournalJournal of Futures Markets
Volume33
Issue number8
DOIs
StatePublished - Aug 2013
Externally publishedYes

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