Liquidity derivatives

Matteo Bagnara, Ruggero Jappelli

It is well established that investors price market liquidity risk. Yet, there exists no financial claim contingent on liquidity. We propose a contract to hedge uncertainty over future transaction costs, detailing potential buyers and sellers. Introducing liquidity derivatives in Brunnermeier and Pedersen (2009) improves financial stability by mitigating liquidity spirals. We simulate liquidity option prices for a panel of NYSE stocks spanning 2000 to 2020 by fitting a stochastic process to their bidask spreads. These contracts reduce the exposure to liquidity factors. Their prices provide a novel illiquidity measure reflecting cross-sectional commonalities. Finally, stock returns significantly spread along simulated prices.

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Year of publication:	[2022]
Authors:	Bagnara, Matteo ; Jappelli, Ruggero
Publisher:	[Frankfurt am Main] : Leibniz Institute for Financial Research SAFE, Sustainable Architecture for Finance in Europe
Subject:	Asset Pricing \| Market Liquidity \| Liquidity Risk \| Theorie \| Theory \| Liquidität \| Liquidity \| Marktliquidität \| Market liquidity \| Derivat \| Derivative \| Portfolio-Management \| Portfolio selection \| Betriebliche Liquidität \| Corporate liquidity

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Extent:	1 Online-Ressource (circa 55 Seiten) Illustrationen
Series:	SAFE working paper. - Frankfurt am Main : SAFE, ZDB-ID 2745463-0. - Vol. no. 358 (September 2022)
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Graue Literatur ; Non-commercial literature ; Arbeitspapier ; Working Paper
Language:	English
Other identifiers:	hdl:10419/264583 [Handle]
Classification:	G12 - Asset Pricing ; G13 - Contingent Pricing; Futures Pricing ; G17 - Financial Forecasting
Source:	ECONIS - Online Catalogue of the ZBW

Persistent link: https://www.econbiz.de/10013365214