Prachi Deuskar

• Indian School of Business

Using a comprehensive dataset of orders and trades in the Indian government bond market, this study presents new evidence on the effect of funding liquidity on market liquidity. We find no evidence that lower short-term interest rates – the key instruments of monetary policy – boost market liquidity. However, consistent with models that stress the...

Margin capacity, defined as the aggregate excess debt capacity of investors buying securities on margin, strongly predicts (i) lower S&P 500 returns, (ii) lower growth in aggregate earnings, dividends, employment, and overall economic activity, (iii) higher macro, financial, and policy uncertainty, (iv) lower interest rates, (v) tighter lending sta...

Using a unique dataset from Chinese stock markets, we quantify the actual effect regret has upon investors’ stock trading behaviour. We find that experienced regret over the type of order placed last time affects the type of order an investor subsequently places. The effect is stronger following an action rather than inaction, loss on the prior ord...

This study investigates market illiquidity and flow-price dynamics, with particular attention to central banks, using a comprehensive dataset for Indian government bonds. While, theoretically, liquidity provision by central banks should promote market depth and stability, some argue that overly active interventions may actually have the opposite ef...

The aversion to future regret has been proposed as an explanation for many puzzles in both economics and finance. Yet very few studies (particularly outside of an experimental setting) have directly analyzed the effect of realized regret on subsequent decision making. We empirically investigate the effect of regret on future decisions in the contex...

In contrast to the perception of a common 2/20 fee structure, we find considerable cross-sectional and time series variations in hedge fund fees using a large panel data set. Fund family characteristics and prior performance play an important role in fee determination. New fund families are likely to charge at- or above-median fees. Initial fees of...

Does the mutual fund industry lose its best managers to hedge funds? We find that mutual funds are able to retain managers with good performance in the face of competition from a growing hedge fund industry. On the other hand, poor performers are more likely to leave the mutual fund industry. A small fraction of these poor performers find jobs with...

Does the mutual fund industry lose its best managers to hedge funds? We find that mutual funds are able to retain managers with good performance in the face of competition from a growing hedge fund industry. On the other hand, poor performers are more likely to leave the mutual fund industry. A small fraction of these poor performers find jobs with...

Using a unique dataset of trades and limit orders for S&P 500 futures, we decompose the aggregate risk into a component driven by the impact of net market orders and a component unrelated to net orders. The first component—flow-driven risk—is large, accounting for approximately 50% of market variance, and it is not transient. This risk represents t...

Can the liquidity premium in asset prices, as documented in the exchange-traded equity and bond markets, be generalized to the over-the-counter (OTC) derivative markets? Using OTC euro (€) interest rate cap and floor data, we find that illiquid options trade at higher prices relative to liquid options. This liquidity discount, though opposite to th...

This paper examines the effects of liquidity on interest rate option prices. Using daily bid and ask prices of euro (¬) interestrate caps and floors, we find that illiquid options trade at higher prices relative to liquid options, controlling for other effects, implying a liquidity discount. This effect is opposite to that found in all studies on o...

We address three questions relating to the interest rate options market: What is the shape of the smile? What are the economic determinants of the shape of the smile? Do these determinants have predictive power for the future shape of the smile and vice versa? We investigate these issues using daily bid and ask prices of euro (€) interest rate caps...

We address three questions relating to the interest rate options market: What is the shape of the smile? What are the economic determinants of the shape of the smile? Do these determinants have predictive power for the futures shape of the smile and vice versa? We investigate these issues using daily bid and ask prices of euro (¬) interest rate cap...

This paper presents a model of the joint behavior of liquidity and volatility. In the model, investors extrapolate recent price movements to forecast the volatility of a risky asset. When the perceived volatility is high, the risk premium is high, the current return on the risky asset is low, the risk-free rate is low, and the market is illiquid. I...

The objectives of this paper are to examine the effect of liquidity on interest rate option prices, and to determine whether it is driven by a common systematic factor. Using daily bid and ask prices of euro (¬) interest rate caps/floors, we document a negative effect of liquidity on option prices illiquid options trade at higher prices relative to...

We investigate the interaction of volatility smiles and liquidity in the euro (¬) interest rate option markets, using daily bid and ask prices of interest rate caps/floors. We find that liquidity variables have significant explanatory power for both curvature and asymmetry of the implied volatility smiles. This effect is generally stronger on the a...

The liquidity of broad claims to aggregate wealth is a crucial financial variable, both in theory and in practice. Direct measurement of this quantity has not been possible to date, leaving many first-order questions unanswered. For instance, how illiquid is the market portfolio, how much does that illiquidity change, and what drives those changes?...