Liquidity effect in OTC options markets: Premium or discount?

Deuskar, Prachi; Gupta, Anurag; Subrahmanyam, Marti G.

doi:10.1016/j.finmar.2010.08.003

Cited by 64 publications

(46 citation statements)

References 59 publications

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“…This is also re-enforced by the absence of a spot-forward arbitrage relationship in the shipping market, meaning that there is no correction mechanism to bring the forward premium back in equilibrium. 24 This result is also consistent with the framework suggesting that liquidity theories may not always hold for OTC derivatives (see Deuskar, et al 2011).…”

Section: Forward Premium and Liquiditysupporting

confidence: 81%

“…This implies that brokers are the main hub for price discovery and bid-ask spreads are set according to supply and demand, as they have to be bilaterally negotiated between sellers and buyers. There are search costs associated with finding bid-ask quotes, especially when traders dynamically rebalance their hedge portfolio (Deuskar, et al 2011). Accordingly, changes in bid-ask levels do not necessarily imply that a transaction took place and as such relationships between FFA returns and bid-ask prices, coming from near-quarter contracts, may not be significant.…”

Section: Resultsmentioning

confidence: 99%

“…Furthermore, Deuskar et al (2011) point out that the liquidity premium in asset prices, as documented in the exchange-traded equity and bond markets, cannot be generalized to the OTC derivatives markets. In fact, examining the Euro interest rate options market, Deuskar et al (2011) highlight that the effect of liquidity on prices or returns of derivatives contracts is not clear, since both the buyers and sellers are exposed to the illiquidity risks.…”

Section: Review Of the Existing Literaturementioning

confidence: 99%

“…In fact, examining the Euro interest rate options market, Deuskar et al (2011) highlight that the effect of liquidity on prices or returns of derivatives contracts is not clear, since both the buyers and sellers are exposed to the illiquidity risks. They argue that it is not obvious whether marginal investors would take a long or a short position.…”

Section: Review Of the Existing Literaturementioning

confidence: 99%

“…However, there are only a few studies that have examined the effect of liquidity on derivatives markets (see Brenner et al 2001, Bongaerts et al 2011and Deuskar et al 2011 and none, to the best of our knowledge, on shipping freight derivatives markets. In this study, a panel-estimation methodology is used to examine the effects of liquidity, as expressed by the Amihud illiquidity measure (Amihud, 2002) and the bid-ask spread on FFA excess returns after controlling for industry-specific and macroeconomic variables.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Liquidity effects and FFA returns in the international shipping derivatives market

Alizadeh

Kappou

Tsouknidis

et al. 2015

Transportation Research Part E: Logistics and Transportation Re

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The study examines the impact of liquidity risk on freight derivatives returns. The Amihud liquidity ratio and bid-ask spreads are utilized to assess the existence of liquidity risk in the freight derivatives market. Other macroeconomic variables are used to control for market risk. Results indicate that liquidity risk is priced and both liquidity measures have a significant role in determining freight derivatives returns. Consistent with expectations, both liquidity measures are found to have positive and significant effects on the returns of freight derivatives. The results have important implications for modeling freight derivatives, and consequently, for trading and risk management purposes.

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Section: Forward Premium and Liquiditysupporting

confidence: 81%

Section: Resultsmentioning

confidence: 99%

Section: Review Of the Existing Literaturementioning

confidence: 99%

Section: Review Of the Existing Literaturementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Liquidity effects and FFA returns in the international shipping derivatives market

Alizadeh

Kappou

Tsouknidis

et al. 2015

Transportation Research Part E: Logistics and Transportation Re

View full text Add to dashboard Cite

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Liquidity, risk, and return: specifying an objective function for the management of foreign reserves

Romanyuk

2012

Appl Stoch Models Bus & Ind

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An objective function is a key component of a strategic portfolio management model used to determine the optimal allocations of assets and, possibly, their associated liabilities over some investment horizon. The author discusses investment philosophies and perspectives for the management of foreign reserves, and investigates how to translate the three common policy objectives for reserves (liquidity, safety, and return) into objective functions for strategic reserves management. Stochastic programming is identified as an advantageous modelling framework to capture the objectives of foreign reserves management, and a strategic reserves management model is illustrated that trades off expected net returns with costs and liquidity issues related to a potential liquidation of a portion of the portfolio. JEL classification: G11 Bank classification: Foreign reserves management RésuméUne fonction objectif est une composante essentielle d'un modèle stratégique de gestion de portefeuille visant à déterminer la répartition optimale des actifs et, éventuellement, des passifs connexes sur un horizon de placement donné. L'auteure se penche sur diverses philosophies de placement et des démarches adaptées à la gestion des réserves de change, et étudie la façon de traduire les trois objectifs poursuivis traditionnellement dans la gestion stratégique des réserves de change (soit la liquidité, la sûreté et le rendement) en des fonctions objectifs facilitant celle-ci. Elle établit que la programmation stochastique est un cadre de modélisation intéressant pour saisir ces objectifs et, pour illustrer son propos, elle présente un modèle stratégique de gestion des réserves qui permet d'exercer un arbitrage entre le rendement net attendu et les coûts et problèmes de liquidité associés à la liquidation potentielle d'une partie du portefeuille.

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From funding liquidity to market liquidity: Evidence from the index options market

Liu

Zhang

Zhou

2018

Journal of Futures Markets

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This study examines the relationship between funding liquidity and market liquidity using daily data on the S&P 500 index options. We find that options market liquidity is positively correlated with funding liquidity after controlling for market uncertainty. Further analysis reveals that the positive relationship between funding liquidity and market liquidity in the options market is mainly driven by short‐term and deep out‐of‐the‐money options. Our results remain robust after controlling for the confounding effects of the equity market and different data frequencies.

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Liquidity effect in OTC options markets: Premium or discount?

Cited by 64 publications

References 59 publications

Liquidity effects and FFA returns in the international shipping derivatives market

Liquidity effects and FFA returns in the international shipping derivatives market

Liquidity, risk, and return: specifying an objective function for the management of foreign reserves

From funding liquidity to market liquidity: Evidence from the index options market

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