Derivatives and Market (Il)liquidity
研究非线性收益的衍生品如何影响基础资产的流动性，发现衍生品交易会稀释知情交易从而降低价格冲击，但对价格反转的影响不确定，并警告流动性指标与流动性风险溢价可能脱节。
Abstract We study how derivatives (with nonlinear payoffs) affect the underlying asset’s liquidity. In a rational expectations equilibrium, informed investors expect low conditional volatility and sell derivatives to the others. These derivative trades affect different investors’ utility differently, possibly amplifying liquidity risk. As investors delta hedge their derivative positions, price impact in the underlying drops, suggesting improved liquidity, because informed trading is diluted. In contrast, effects on price reversal are ambiguous, depending on investors’ relative delta hedging sensitivity (i.e., the gamma of the derivatives). The model cautions of potential disconnections between illiquidity measures and liquidity risk premium due to derivatives trading.