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Equilibrium open interest

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Author Info

  • Judd, Kenneth L.
  • Leisen, Dietmar P.J.

Abstract

This paper analyses what determines an individual investor's risk-sharing demand for options and, aggregating across investors, what the equilibrium demand for options. We find that agents trade options to achieve their desired skewness; specifically, we find that portfolio holdings boil down to a three-fund separation theorem that includes a so-called skewness portfolio that agents like to attain. Our analysis indicates also, however, that the common risk-sharing setup used for option demand and pricing is incompatible with a stylized fact about open interest across strikes.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 12 (December)
Pages: 2578-2600

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:12:p:2578-2600

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Option demand Open interest Co-skewness Skewness preference;

References

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Cited by:
  1. Ming-Hsien Chen & Vivian Tai, 2014. "The price discovery of day trading activities in futures market," Review of Derivatives Research, Springer, vol. 17(2), pages 217-239, July.

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