|
Archive@NYU >
Stern School of Business >
Finance Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26383
|
| Title: | Liquidity Effects in Interest Rate Options Markets:Premium or Discount? |
| Authors: | DEUSKAR, PRACHI
GUPTA, ANURAG
SUBRAHMANYAM, MARTI G. |
| Keywords: | interest rate options
euro interest rate markets
volatility smiles
Liquidity |
| Issue Date: | 25-May-2008 |
| Series/Report no.: | FIN-06-025 |
| Abstract: | This paper examines the effects of liquidity on interest rate option
prices. Using daily bid and ask prices of euro (€) interest rate
caps and floors, we find that illiquid options trade at higher prices
relative to liquid options, controlling for other effects, implying a
liquidity discount. This effect is opposite to that found in all studies
on other assets such as equities and bonds, but is consistent with the
structure of this over-the-counter market and the nature of the demand
and supply forces. We also identify a systematic factor that drives
changes in the liquidity across option maturities and strike rates. This
common liquidity factor is associated with lagged changes in investor
perceptions of uncertainty in the equity and fixed income markets. |
| URI: | http://hdl.handle.net/2451/26383 |
| Appears in Collections: | Finance Working Papers
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
