Breadcrumb

 
 

Essays in liquidity

Title:

Essays in liquidity

Galy, Sébastien (2003) Essays in liquidity. PhD thesis, Concordia University.

[img]
Preview
PDF
3845Kb

Abstract

Derivatives markets can quickly become illiquid in periods of high uncertainty. Neither the source of this illiquidity nor its implications are well understood. First, this thesis shows that hedgers' trades have an adverse impact on the futures price creating effectively an endogenous transaction cost increasing in times of uncertainty and acting as the source of illiquidity in these markets. Second, illiquidity is shown to strengthen the wealth effect, which has been proven to be too weak empirically to explain the behavior of prices. The wealth effect is the mechanism through which changes in investors' wealth impact their attitude towards risk. As investors lose wealth, they become more risk averse and ask for a higher compensation to hold a risky asset thereby decreasing its price. Third, illiquidity is shown to potentially explain the shape of the implied volatility function not only as a function of moneyness but also of the options' volume or open interest. These results are derived from models, where producers maximize their expected utility derived from their profits. They seek to hedge the uncertain price at which they will sell their product in the future. They can use futures or put options to reduce this price risk but must pay speculators, defined as having no position in the underlying asset, a premium. This premium disappears normally as trades are assumed to be too small to matter and the risk of trading perfectly shared. Both of these assumptions are relaxed to derive the illiquidity transaction costs and its implications.

Divisions:Concordia University > John Molson School of Business
Item Type:Thesis (PhD)
Authors:Galy, Sébastien
Pagination:ix, 119 leaves : ill. ; 29 cm.
Institution:Concordia University
Degree Name:Theses (Ph.D.)
Program:John Molson School of Business
Date:2003
Thesis Supervisor(s):Shanker, Latha
ID Code:2000
Deposited By:Concordia University Libraries
Deposited On:27 Aug 2009 13:24
Last Modified:08 Dec 2010 10:24
Related URLs:
All items in Spectrum are protected by copyright, with all rights reserved. The use of items is governed by Spectrum's terms of access.

Repository Staff Only: item control page

Document Downloads

More statistics for this item...

Concordia University - Footer