Investors with Too Many Options?
45 Pages Posted: 18 Mar 2010 Last revised: 27 Jul 2010
There are 2 versions of this paper
Investors with Too Many Options?
Date Written: July 26, 2010
Abstract
Markets for over-the-counter derivatives have flourished during the last decade, especially in Europe and Asia. In these markets, investors often face a choice between many instruments that differ only slightly from each other. Based on retail trades in call options on the German DAX index, this paper documents substantial price dispersion across securities that are close substitutes. Moreover, investors generally fail to identify attractive options. The results suggest that the observed product proliferation imposes a substantial search cost on investors even though the products are homogenous and their pricing is well understood. The search cost is estimated to average 1% of the amount invested, the same order of magnitude as the average spread.
Keywords: OTC derivatives, price dispersion, investor behavior, search costs
JEL Classification: G11, G13, D83
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Alternative Market Structures for Derivatives
By Söhnke M. Bartram and Frank Fehle
-
Competition Without Fungibility: Evidence from Alternative Market Structures for Derivatives
By Söhnke M. Bartram and Frank Fehle
-
Does Adverse Selection Affect Bid-Ask Spreads for Options‘
By Söhnke M. Bartram, Frank Fehle, ...
-
Investors with Too Many Options?
By Daniel Dorn
-
The Dynamics of Overpricing in Structured Products
By Thomas Ruf
-
The Trade-Off Between Liquidity and Precision of Position in Option Contracts
-
The Demand for Warrants and Issuer Pricing Strategies
By Rainer Baule and Philip Blonski
-
The Effect of Issuer Leverage on Issuer Bid and Ask Quotes for Structured Retail Product
By Stefan Petry