Options illiquidity in an over-the-counter market

Jungkyu Ahn

International Review of Financial Analysis, 2024, vol. 94, issue C

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.

Keywords: Illiquidity; Currency options; Sequential search; Bilateral bargaining; Outside options (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:94:y:2024:i:c:s1057521924002357

DOI: 10.1016/j.irfa.2024.103303

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