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The Trade-Off Between Liquidity and Precision of Position in Option Contracts

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Author Info

  • Koch, Alexander K.
  • Lazarov, Zdravetz

Abstract

More liquid financial contracts are claimed to draw trading volume from contracts for which they are close substitutes. We provide the first analysis of how trading volume across existing financial contracts is affected by changes in the factors that govern the degree to which they are substitutes. Using data on DAX options with different strike prices, we identify these factors and their impact on the distribution of trades across contracts. The results are relevant for exchange design since they help gauge when options with different strike prices are good (bad) substitutes and the strike price grid should be coarse (fine).

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File URL: http://purl.umn.edu/50155
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Bibliographic Info

Article provided by Review of Applied Economics in its journal Review of Applied Economics.

Volume (Year): 3 (2007)
Issue (Month): 1-2 ()
Pages:

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Handle: RePEc:ags:reapec:50155

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Web page: http://www.lincoln.ac.nz/story11874.html

Related research

Keywords: Clustering; Exchange Design; Options; Risk and Uncertainty; G10; G20; L15;

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  1. Sohnke M. Bartram & Frank R. Fehle, 2003. "Alternative Market Structures for Derivatives," Finance 0311007, EconWPA, revised 12 Dec 2003.
  2. Söhnke M. Bartram & Gregory W. Brown & Frank R. Fehle, 2009. "International Evidence on Financial Derivatives Usage," Financial Management, Financial Management Association International, vol. 38(1), pages 185-206, 03.
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