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Bid–Ask Spreads and Implied Volatilities of Key Players in a FX Options Market


  • Dan Galai,

    1. Dan Galai is the Abe Gray Professor of Finance and Business Administration at the Hebrew University School of Business Administration, Jerusalem, Israel and is a Principal in Sigma PCM Ltd.
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  • Ben Z. Schreiber

    Corresponding author
    • Ben Z. Schreiber is at the Information and Statistics Department, Bank of Israel, Jerusalem, Israel, as well as Bar Ilan University, and Ono Academic College
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  • We would like to thank the participants of the seminars held at the International Conference on Futures and Option Markets, the Hebrew University, and at the Bank of Israel. We also thank George Pennacchi, Zvi Wiener, Eugene Kandel, Zhuo Huang, and Orly Sade for most helpful comments and June Dilevsky for editorial assistance. Dan Galai acknowledges the partial financial support of the Zagagi fund at the Hebrew University.

Correspondence author, Information and Statistics Department, Bank of Israel and Ono Academic College, 1 Bank of Israel St., Jerusalem 91007, Israel. Tel: 972-2-6552595, Fax: 972-2-6669595, e-mail:


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. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark

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