Illiquidity transmission from spot to futures markets

Korn, Olaf ; Krischak, Paolo Karl Robert ; Theissen, Erik

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Document Type: Working paper
Year of publication: 2014
The title of a journal, publication series: CFR Working Paper
Volume: 14-10
Place of publication: Köln
Publication language: English
Institution: Business School > ABWL u. Finanzierung (Theissen 2009-)
Subject: 330 Economics
Abstract: We develop a model of the illiquidity transmission from spot to futures markets that formalizes the derivative hedge theory proposed by Cho and Engle (1999). The model shows that spot market illiquidity does not translate one-to-one to the futures market, but rather interacts with price risk, liquidity risk, and the risk aversion of the market maker. The predictions of the model are tested empirically with data from the stock market and the market for single-stock futures. The results support our model. In particular, they show that the derivative hedge theory is important for the explanation of the liquidity link between spot and futures markets. Our results provide no evidence in favor of the substitution hypothesis.

Dieser Eintrag ist Teil der Universitätsbibliographie.

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