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Working Paper
Directly measuring early exercise premiums using American and European S&P 500 index options
The Chicago Board Options Exchange concurrently listed European-style and American-style options on the Standard and Poor's 500 Index from April 2, 1986 through June 20, 1986. This unique time period allows for a direct measurement of the early-exercise premium in American-style index options. In this study, using ask quotes, we find average early exercise premiums ranging from 5.04% to 5.90% for calls, and from 7.97% to 10.86% for puts. Additionally, we are able to depict a potentially useful functional form of the early exercise premium. As in previous studies, we find some instances of ...
Working Paper
Market microstructure effects on the direct measurement of the early exercise premium in exchange-listed options
The Chicago Board Options Exchange concurrently listed European-style and American-style options on the Standard and Poor?s 500 Index from April 2, 1986 through June 20, 1986. We match near-the-money American option quotes with the most nearly contemporaneous, otherwise identical, European option quote. In this unique sample, the bid-ask spread for the American options is twice as large as the bid-ask spread for the European options. We find that the differences in the size of the bid-ask spreads and non-contemporaneous observations create an errors-in-variables problem that, if ignored, ...