File Download
There are no files associated with this item.
Supplementary
-
Citations:
- Appears in Collections:
Conference Paper: Volatility Derivatives and Market (Il)liquidity
Title | Volatility Derivatives and Market (Il)liquidity |
---|---|
Authors | |
Keywords | derivatives options liquidity risk premium liquidity measure price impact |
Issue Date | 2019 |
Citation | Ninth Erasmus Liquidity Conference (2019), Rotterdam, the Netherlands, 14-15 May 2019 How to Cite? |
Abstract | We study how derivatives (with nonlinear payoffs) affect the liquidity of their underlying assets. In a
noisy rational expectations equilibrium, informed investors expect low conditional volatility and sell
derivatives to others. These derivative trades affect 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. |
Description | Session V: FinTech |
Persistent Identifier | http://hdl.handle.net/10722/284722 |
DC Field | Value | Language |
---|---|---|
dc.contributor.author | Huang, S | - |
dc.contributor.author | Yueshen, B | - |
dc.contributor.author | Zhang, C | - |
dc.date.accessioned | 2020-08-07T09:01:46Z | - |
dc.date.available | 2020-08-07T09:01:46Z | - |
dc.date.issued | 2019 | - |
dc.identifier.citation | Ninth Erasmus Liquidity Conference (2019), Rotterdam, the Netherlands, 14-15 May 2019 | - |
dc.identifier.uri | http://hdl.handle.net/10722/284722 | - |
dc.description | Session V: FinTech | - |
dc.description.abstract | We study how derivatives (with nonlinear payoffs) affect the liquidity of their underlying assets. In a noisy rational expectations equilibrium, informed investors expect low conditional volatility and sell derivatives to others. These derivative trades affect 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. | - |
dc.language | eng | - |
dc.relation.ispartof | Ninth Erasmus Liquidity Conference | - |
dc.subject | derivatives | - |
dc.subject | options | - |
dc.subject | liquidity risk premium | - |
dc.subject | liquidity measure | - |
dc.subject | price impact | - |
dc.title | Volatility Derivatives and Market (Il)liquidity | - |
dc.type | Conference_Paper | - |
dc.identifier.email | Huang, S: huangsy@hku.hk | - |
dc.identifier.authority | Huang, S=rp02052 | - |
dc.identifier.hkuros | 312036 | - |