A market-induced mechanism for stock pinning
AbstractWe propose a model to describe stock pinning on option expiration dates. We argue that if the open interest on a particular contract is unusually large, delta-hedging in aggregate by floor market-makers can impact the stock price and drive it to the strike price of the option. We derive a stochastic differential equation for the stock price which has a singular drift that accounts for the price-impact of delta-hedging. According to this model, the stock price has a finite probability of pinning at a strike. We calculate analytically and numerically this probability in terms of the volatility of the stock, the time-to-maturity, the open interest for the option under consideration and a 'price elasticity' constant that models price impact.
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Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Quantitative Finance.
Volume (Year): 3 (2003)
Issue (Month): 6 ()
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Web page: http://taylorandfrancis.metapress.com/link.asp?target=journal&id=111405
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- Benjamin Golez & Jens Carsten Jackwerth, 2010.
"Pinning in the S&P 500 Futures,"
Working Paper Series of the Department of Economics, University of Konstanz
2010-12, Department of Economics, University of Konstanz.
- Jeannin, M. & Iori, G. & Samuel, D., 2006.
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06/04, Department of Economics, City University London.
- Xiaoyan Ni, Sophie & Pearson, Neil D. & Poteshman, Allen M., 2005. "Stock price clustering on option expiration dates," Journal of Financial Economics, Elsevier, vol. 78(1), pages 49-87, October.
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