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http://hdl.handle.net/2451/26791
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| Title: | Demand-Based Option Pricing |
| Authors: | Gârleanu, Nicolae
Pedersen, Lasse Heje
Poteshman, Allen M. |
| Issue Date: | Jan-2006 |
| Series/Report no.: | S-DRP-06-01 |
| Abstract: | We model demand-pressure effects on option prices. The model shows that
demand pressure in one option contract increases its price by an amount
pro- portional to the variance of the unhedgeable part of the option.
Similarly, the demand pressure increases the price of any other option
by an amount propor- tional to the covariance of their unhedgeable
parts. Empirically, we identify aggregate positions of dealers and end
users using a unique dataset, and show that demand-pressure effects
contribute to well-known option-pricing puzzles. In- deed, time-series
tests show that demand helps explain the overall expensiveness and skew
patterns of both index options and single-stock options |
| URI: | http://hdl.handle.net/2451/26791 |
| Appears in Collections: | Derivatives Research
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