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http://ssrn.com/abstract=923905
 
 

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Liquidity Effect in OTC Options Markets: Premium or Discount?


Prachi Deuskar


Indian School of Business

Anurag Gupta


Case Western Reserve University - Department of Banking & Finance

Marti G. Subrahmanyam


New York University - Stern School of Business

February 2, 2010

Journal of Financial Markets, Forthcoming

Abstract:     
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. Our results suggest that the effect of liquidity on asset prices cannot be generalized without regard to the characteristics of the market.

Number of Pages in PDF File: 49

Keywords: Liquidity, interest rate options, euro interest rate markets, Euribor market, OTC options markets

JEL Classification: G10, G12, G13, G15

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Date posted: December 5, 2005 ; Last revised: August 20, 2010

Suggested Citation

Deuskar, Prachi and Gupta, Anurag and Subrahmanyam, Marti G., Liquidity Effect in OTC Options Markets: Premium or Discount? (February 2, 2010). Journal of Financial Markets, Forthcoming. Available at SSRN: http://ssrn.com/abstract=923905

Contact Information

Prachi Deuskar
Indian School of Business ( email )
Hyderabad, Gachibowli 500 019
India
Anurag Gupta (Contact Author)
Case Western Reserve University - Department of Banking & Finance ( email )
10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-2938 (Phone)
216-368-4776 (Fax)
Marti G. Subrahmanyam
New York University - Stern School of Business ( email )
Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)
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