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research article
Illiquidity and Higher Cumulants
September 14, 2022
We characterize the unique equilibrium in an economy populated by strategic CARA investors who trade multiple risky assets with arbitrarily distributed payoffs. We use our explicit solution to study the joint behavior of illiquidity of option contracts. Option bid-ask spreads are proportional to risk aversion and risk-neutral variances of option payoffs. Spreads may decrease in risk aversion, physical variance, open interest, and increase after earnings announcements in a result contrary to conventional wisdom. All these predictions are confirmed empirically using a large panel data set of U.S. stock options.
Type
research article
Web of Science ID
WOS:000861188500001
Authors
Publication date
2022-09-14
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Published in
Peer reviewed
REVIEWED
EPFL units
Available on Infoscience
October 10, 2022
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