Implied transaction costs by Leland option pricing model: a new approach and empirical evidence

Li, Steven and Abdullah, Mimi Hafizah (2012) Implied transaction costs by Leland option pricing model: a new approach and empirical evidence. Journal of Derivatives & Hedge Funds, 18 (4). pp. 333-360. ISSN 1753-9641 (Print)1753-965X (Online)

Preview	PDF (Implied transaction costs by Leland option pricing model: A new approach and empirical evidence) - Published Version Download (205kB) | Preview
	PDF (Scopus) - Published Version Restricted to Repository staff only Download (72kB) | Request a copy

Abstract

Estimation of transaction costs in a stock market is an important issue for stock trading, asset pricing, stock market regulation and so on, and it is often done by combining the bid-ask spread estimate with commissions and other fees provided by market participants, which can be subjective. This study aims to offer an innovative alternative method to estimate the transaction costs in stock trading via the implied transaction costs by using the Leland option pricing model. The effectiveness of this new approach is tested by using the S&P/ASX 200 index call options data. On the basis of the actual transaction costs estimates on the Australian Securities Exchange (ASX) documented by previous studies and Roll’s model, the empirical results reveal that this new approach can provide a reliable transaction costs estimate on stock trading on the ASX. Furthermore, the accuracy of the implied transaction costs across option moneyness and maturity and the variation of the implied transaction costs during the recent global financial crisis period are investigated.

Item Type:	Article (Journal)
Additional Information:	4482/28536
Uncontrolled Keywords:	implied transaction costs; Leland option pricing model; index options; empirical
Subjects:	H Social Sciences > HG Finance > HG4001 Financial management. Business finance. Corporation finance.
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button):	Kulliyyah of Science > Department of Computational and Theoretical Sciences
Depositing User:	Ms Mimi Hafizah Abdullah
Date Deposited:	15 Jan 2013 15:33
Last Modified:	28 Nov 2014 11:43
URI:	http://irep.iium.edu.my/id/eprint/28536

Actions (login required)

View Item