Transaction cost discovery by decomposition of the error term: a bootstrapping approach

Abstract

There is agreement regarding the fundamental role of transaction costs in determining currency options market efficiency. However, the estimation of transaction costs in thei relationship is controversial. In this study, a bootstrapping approach is adapted to decompose the error term of the put-call parity regression analaysis in order to estimate transaction costs. This robust transaction cost calculation will be valuable to traders and researchers as it eliminates dependence on crude proxies for transaction costs.