8/24/2023 0 Comments Option alpha signals pdf download![]() ![]() (2007) and Gârleanu, Pedersen, and Poteshman (2009) document that in the equity option market, end users are net sellers. Market makers need to hedge these risky positions ( Jameson and Wilhelm 1992 Engle and Neri 2010) and cross-sectional differences in the resultant costs and risks should be reflected in illiquidity measures as well as the cross-section of expected option returns. In zero net supply derivatives markets, market makers absorb buying and selling pressures and the sign of net demand determines if the illiquidity premium is positive or negative. In positive net supply markets, such as in bond or stock markets, it is natural to expect a positive illiquidity premium ( Amihud and Mendelson 1986).
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