The nontradability premium of derivatives contracts

Rafi Eldor, Shmuel Hauser, Michael Kahn, Avraham Kamara

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

We investigate nontradable and tradable identical Treasury derivatives. The nontradability premium is statistically and economically significant, and it covaries positively with interest rate volatility and relative tightness in the markets. Our data offer an almost-perfect laboratory to study the determinants of liquidity. The product of conditional interest rate volatility times the underlying bill's turnover is a better liquidity measure than the trading volume, amount outstanding, and turnover. A higher turnover is associated with a lower expected time for trading at a "desirable" price. The higher the volatility, the larger the marginal value of a reduction in the expected time to trade.

Original languageEnglish
Pages (from-to)2067-2097
Number of pages31
JournalJournal of Business
Volume79
Issue number4
DOIs
StatePublished - 1 Jul 2006

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