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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|
|Appears in Collections:||Derivatives Research|
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