Liquidity effect in OTC options markets: Premium or discount?

Deuskar, P and Gupta, A and Subrahmanyam, M G (2011) Liquidity effect in OTC options markets: Premium or discount? Journal of Financial Markets, 14 (1). 127 - 160.



Can the liquidity premium in asset prices, as documented in the exchange-traded equity and bond markets, be generalized to the over-the-counter (OTC) derivative markets? Using OTC euro (€) interest rate cap and floor data, we find that illiquid options trade at higher prices relative to liquid options. This liquidity discount, though opposite to that found in equities and bonds, is consistent with the structure of this OTC market and the nature of its demand and supply forces. The results suggest that the effect of liquidity on asset prices cannot be generalized without regard to the characteristics of the market.

Affiliation: Indian School of Business
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Item Type: Article
Additional Information: The research paper was published by the author with the affiliation of University of Illinois.
Uncontrolled Keywords: Liquidity, Interest rate options, Euro interest rate markets, Euribor market, OTC options markets
Subjects: Finance
Depositing User: Ilayaraja M
Date Deposited: 17 May 2019 15:57
Last Modified: 17 May 2019 15:57
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