Bibliographic Details
| Title: |
Derivatives and Market (Il)liquidity. |
| Authors: |
Huang, Shiyang1 (AUTHOR) huangsy@hku.hk, Yueshen, Bart Z.2 (AUTHOR) b@yueshen.me, Zhang, Cheng3 (AUTHOR) cheng.zhang161@du.edu |
| Source: |
Journal of Financial & Quantitative Analysis. Feb2024, Vol. 59 Issue 1, p157-194. 38p. |
| Subject Terms: |
*Derivative securities, *Liquidity (Economics), *Risk premiums, *Rational expectations (Economic theory), *Economic equilibrium, *Information asymmetry, Jacobian matrices |
| Abstract: |
We study how derivatives (with nonlinear payoffs) affect the underlying asset's liquidity. In a rational expectations equilibrium, informed investors expect low conditional volatility and sell derivatives to the others. These derivative trades affect different investors' utility differently, possibly amplifying liquidity risk. As investors delta hedge their derivative positions, price impact in the underlying drops, suggesting improved liquidity, because informed trading is diluted. In contrast, effects on price reversal are ambiguous, depending on investors' relative delta hedging sensitivity (i.e., the gamma of the derivatives). The model cautions of potential disconnections between illiquidity measures and liquidity risk premium due to derivatives trading. [ABSTRACT FROM AUTHOR] |
|
Copyright of Journal of Financial & Quantitative Analysis is the property of Cambridge University Press and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.) |
| Database: |
Business Source Complete |
