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Illiquid Markets (illiquid + market)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting50%

Selected Abstracts

The relation between implied and realised volatility in the Danish option and equity markets

ACCOUNTING & FINANCE, Issue 3 2001
Charlotte Strunk Hansen
We show that the conclusions to be drawn concerning the informational efficiency of illiquid options markets depend critically on whether one carefully recognises and appropriately deals with the econometrics of the errors-in-variables problem. This paper examines the information content of options on the Danish KFX share index. We consider the relation between the volatility implied in an option's price and the subsequently realised index return volatility. Since these options are traded infrequently and in low volumes, the errors-in-variables problem is potentially large. We address the problem directly using instrumental variables techniques. We find that when measurement errors are controlled for, call option prices even in this very illiquid market contain information about future realised volatility over and above the information contained in historical volatility. [source]

Implied trees in illiquid markets: A Choquet pricing approach

INTERNATIONAL JOURNAL OF INTELLIGENT SYSTEMS, Issue 6 2002
Silvia Muzzioli
Implied trees are necessary to implement the risk neutral valuation approach, and standard methodologies for their derivation are based on the validity of the put call parity. However, in illiquid markets the put call parity fails to hold, and the uniqueness of the artificial probabilities leaves room for an interval. The contribution of this article is twofold. First we propose a methodology for the derivation of implied trees in illiquid markets. Such a methodology, by contrast with standard ones, takes into account the information stemming both from call and put prices. Second, we set up a framework for pricing derivatives written on an underlying asset traded on an illiquid market. To this end we have extended the Choquet integral definition to account for interval payoffs of the underlying asset. The price interval we obtain may be interpreted as a bid-ask price quoted by the intermediary issuing the derivative security. © 2002 Wiley Periodicals, Inc. [source]

Liquidity in Asset Markets With Search Frictions

ECONOMETRICA, Issue 2 2009
Ricardo Lagos
We develop a search-theoretic model of financial intermediation in an over-the-counter market and study how trading frictions affect the distribution of asset holdings and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of trade volume, bid,ask spreads, and trading delays,the dimensions of market liquidity that search-based theories seek to explain. [source]

Liquidity, Volatility and Equity Trading Costs Across Countries and Over Time

INTERNATIONAL FINANCE, Issue 2 2001
Ian Domowitz
Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity and volatility, and analyses their determinants using panel data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets, in particular, have significantly higher trading costs even after correcting for factors such as market capitalization and volatility. We analyse the inter-relationships between turnover, equity trading costs and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolio's expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account. [source]

Implied trees in illiquid markets: A Choquet pricing approach

INTERNATIONAL JOURNAL OF INTELLIGENT SYSTEMS, Issue 6 2002
Silvia Muzzioli
Implied trees are necessary to implement the risk neutral valuation approach, and standard methodologies for their derivation are based on the validity of the put call parity. However, in illiquid markets the put call parity fails to hold, and the uniqueness of the artificial probabilities leaves room for an interval. The contribution of this article is twofold. First we propose a methodology for the derivation of implied trees in illiquid markets. Such a methodology, by contrast with standard ones, takes into account the information stemming both from call and put prices. Second, we set up a framework for pricing derivatives written on an underlying asset traded on an illiquid market. To this end we have extended the Choquet integral definition to account for interval payoffs of the underlying asset. The price interval we obtain may be interpreted as a bid-ask price quoted by the intermediary issuing the derivative security. © 2002 Wiley Periodicals, Inc. [source]