volume as a measure of liquidity and supports the derivative hedge theory. Option market spreads are positively related to … using transactions data. We propose a new market microstructure theory which we call derivative hedge theory, in which … underlying market, as measured by the liquidity of the latter market. In a perfect hedge world, spreads arise from the …

We study the efficiency of dealers' liquidity provision and the desirability of policy intervention in over …-the-counter (OTC) markets during crises. Our theory emphasizes two key frictions in OTC markets: finding counterparties takes time, and …' asset demands that lasts until a random recovery time. In this context, dealers can provide liquidity to outside investors …

We provide a model that links an asset's market liquidity - i.e., the ease with which it is traded - and traders …' funding liquidity - i.e., the ease with which they can obtain funding. Traders provide market liquidity, and their ability to … are charged, depend on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and …

Extreme market outcomes are often followed by a lack of liquidity and a lack of trade. This market collapse seems … particularly acute for markets where traders rely heavily on a specific empirical model such as in derivative markets. Asset …-returns distribution. To explore the connection of uncertainty with liquidity, we specify a simple market where a monopolist financial …