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Options illiquidity in an over-the-counter market

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  • Ahn, Jungkyu

Abstract

This article reveals that the intensity of search determines whether illiquid currency options trade at premia or at discounts. For options in a standalone search market, illiquidity leads to price premia, as intermediating dealers, who are presumably short in the equilibrium, demand additional compensation. With the presence of listed options at exchanges, illiquidity results in price discounts, as dealers provide concessions for customers’ alternative trading opportunities. The presence of substitutes changes the market outcome. Illiquidity premia and discounts coexist in a sufficiently one-sided market.

Suggested Citation

  • Ahn, Jungkyu, 2024. "Options illiquidity in an over-the-counter market," International Review of Financial Analysis, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:finana:v:94:y:2024:i:c:s1057521924002357
    DOI: 10.1016/j.irfa.2024.103303
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    More about this item

    Keywords

    Illiquidity; Currency options; Sequential search; Bilateral bargaining; Outside options;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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