THE PRICE OF OPTIONS ILLIQUIDITY

The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique data set which allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange. We find that the non-tradable options are priced about 21 percent less than the exchange traded options. This gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process

The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors

In the repo market, forward agreements are security-specific (i.e., there are no deliverable substitutes), which makes it an ideal place to measure the value of fluctuations in a security's available supply. In this study, we quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all the outstanding U.S. Treasury securities. Our results indicate the existence of an economically and statistically significant scarcity premium, especially for shorter-term securities. The estimated scarcity effect is quite persistent, seems to be reflected in the Treasury market prices, and could in part explain the flow-effects of the Fed's asset purchase programs. More generally, it provides additional evidence in favor of the scarcity channel of quantitative easing. These findings also suggest that, through the same mechanism, the Fed's reverse repo operations could help alleviate potential shortages of high-quality collateral

Small investment and large returns: Terrorism, media and the economy

The study investigates the role of the media in the impact of terrorism on the economy. A unique data set of the newspaper articles that reported terrorist attacks during 2002 is used to evaluate their impact on the Tel Aviv Stock Exchange. An econometric analysis is performed in order to understand how a newspaper decides to cover a terrorist attack, i.e. the number of articles, positioning of articles, whether to include photos and the size of headlines. It was found that media coverage is an important channel through which terrorism produces economic damage. The findings also showed that the economic damage caused by terrorist attacks increases monotonically with the amount of media coverage. It was also found that the economic impact of the media coverage diminishes over time.Terror Terrorism Media Stock markets September 11

The Price of Options Illiquidity

The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique data set which allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange. We find that the non-tradable options are priced about 21% less than the exchange traded options. It is an anomaly that cannot be explained by non-hedgeable risks like jumps in the prices of the liquid options which we use in replicating the payoffs of the illiquid options.

The Nontradability Premium of Derivatives Contracts

We investigate nontradable and tradable identical Treasury derivatives. The nontradability premium is statistically and economically significant, and it covaries positively with interest rate volatility and relative tightness in the markets. Our data offer an almost-perfect laboratory to study the determinants of liquidity. The product of conditional interest rate volatility times the underlying bill's turnover is a better liquidity measure than the trading volume, amount outstanding, and turnover. A higher turnover is associated with a lower expected time for trading at a "desirable" price. The higher the volatility, the larger the marginal value of a reduction in the expected time to trade.