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 & Francis Journals in its journal Quantitative Finance.
Volume (Year): 3 (2003)
Issue (Month): 6 ()
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Web page: http://www.tandfonline.com/RQUF20
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- Marc Jeannin & Giulia Iori & David Samuel, 2008.
"Modeling stock pinning,"
Taylor & Francis Journals, vol. 8(8), pages 823-831.
- 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.
- Golez, Benjamin & Jackwerth, Jens Carsten, 2012.
"Pinning in the S&P 500 futures,"
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Elsevier, vol. 106(3), pages 566-585.
- 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.
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