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Borrowing Constraint and the Effect of Option Introduction

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  • Amira, Khaled
  • Bennour, Khaled

Abstract

This paper studies how options trading, by circumventing constraints on borrowing, permits optimistic investors to hold the desired portfolio. Unconstrained investors proceed to a portfolio rebalancing by constructing a zero-income portfolio that consists of a short position in the option, a long position in the stock and a short position in the riskless asset. We show that aggregate demand for the stock is what prevails when options do not exist and no constraints hold. Furthermore, the option listing causes an increase in the aggregate demand for the stock and consequently an increase in the equilibrium stock price.

Suggested Citation

  • Amira, Khaled & Bennour, Khaled, 2010. "Borrowing Constraint and the Effect of Option Introduction," MPRA Paper 26440, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:26440
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    References listed on IDEAS

    as
    1. Detemple, Jerome B & Selden, Larry, 1991. "A General Equilibrium Analysis of Option and Stock Market Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 279-303, May.
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    7. Jérôme Detemple & Angel Serrat, 2003. "Dynamic Equilibrium with Liquidity Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 597-629.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    options; credit constraints; stock price; arbitrage;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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