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Efficiency Tests of the Foreign Currency Options Market
Author(s) -
BODURTHA JAMES N.,
COURTADON GEORGES R.
Publication year - 1986
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1986.tb04496.x
Subject(s) - transaction cost , currency , economics , spot contract , database transaction , foreign exchange market , simultaneity , spot market , financial economics , monetary economics , business , microeconomics , computer science , engineering , electricity , programming language , physics , electrical engineering , classical mechanics , futures contract
Based on a new options transactions data base from the Philadelphia Stock Exchange Foreign Currency Options Market, this paper examines the importance of the effect of nonsynchronous prices and transaction costs on the usual option market efficiency tests. The tests conducted are based on the transaction cost adjusted early exercise and put‐call parity pricing boundaries applicable to the American foreign currency options market. The test results show that the put‐call parity boundary tests are sensitive to both nonsynchronous prices and transaction costs. The early exercise boundary tests are sensitive to transaction costs but are not very sensitive to simultaneity of the option price and the underlying spot price. Under the no‐transaction costs scenario, a large number of early exercise boundary violations is found even when simultaneous spot and option prices are used. These violations disappear when actual transaction costs are taken into account.