Matos, Joao Amaro de; Antao, Paula - Faculdade de Economia, Universidade Nova de Lisboa - 2000
This paper analyzes the impact of illiquidity of a stock on the pricing of derivatives. In particular, it is shown how illiquidity generates a bid-ask spread in an option on this stock, even in the absence of other imperfections, such as transaction costs and asymmetry of information. Moreover,...