The Nontradability Premium of Derivatives Contracts

48 Pages Posted: 13 Jun 2005

See all articles by Rafi (Rafael) Eldor

Rafi (Rafael) Eldor

Interdisciplinary Center (IDC) Herzliya - Arison School of Business

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management; Government of the State of Israel - Israel Securities Authority

Michael Kahn

Independent

Avraham Kamara

University of Washington - Michael G. Foster School of Business

Abstract

We investigate nontradable and tradable identical Treasury derivatives. The nontradability premium is statistically and economically significant, and covaries positively with interest rate volatility and relative tightness in the markets. Our data offer an almost-perfect laboratory to study the determinants of liquidity. The product of conditional interest rate volatility times the underlying bill's turnover is a better liquidity measure than trading volume, amount outstanding, and turnover. A higher turnover is associated with a lower expected time to trade at a "desirable" price. The higher the volatility, the larger the marginal value of a reduction in the expected time to trade.

Suggested Citation

Eldor, Rafi (Rafael) and Hauser, Shmuel and Kahn, Michael and Kamara, Avraham, The Nontradability Premium of Derivatives Contracts. Journal of Business, Vol. 79, No. 5, September 2006, Available at SSRN: https://ssrn.com/abstract=742566

Rafi (Rafael) Eldor

Interdisciplinary Center (IDC) Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-952-7234 (Phone)
972-9-956-3616 (Fax)

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management ( email )

P.O. Box 653
Beer-Sheva 84105
Israel
+972 2 651 3939 (Phone)
+972 7 6472896 (Fax)

Government of the State of Israel - Israel Securities Authority

22 Kanfei Nesharim Street
Jerusalem 95464
Israel

Michael Kahn

Independent ( email )

Avraham Kamara (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543-0652 (Phone)
206-221-6856 (Fax)

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