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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, ...
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 ...