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Why Do Financial Intermediaries Buy Put Options from Companies?

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Author Info

  • Gyoshev, Stanley
  • Kaplan, Todd R.
  • Szewczyk, Samuel
  • Tsetsekos, George

Abstract

In the 1990s, companies collected billions in premiums from peculiarly structured put options written on their own stock while almost all of these puts expired worthless. Buyers of these options, primarily �nancial intermediaries, lost money as a result. Although these losses might seem puzzling, by offering to buy put options from better informed parties, intermediaries receive private information about the issuing company. We fi�nd that the magnitude of changes and structural breaks in the stocks' �price trends and volumes around the put sales indicate that the intermediaries were indeed acting on this information and potentially made hundreds of billions of dollars.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43149.

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Date of creation: 04 Dec 2012
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Handle: RePEc:pra:mprapa:43149

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Related research

Keywords: Separating Equilibrium; Put Options; Information Acquisition; Strategic Trading;

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References

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  1. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, Elsevier, vol. 97(1), pages 93-115, July.
  2. Ajinkya, Bipin B. & Jain, Prem C., 1989. "The behavior of daily stock market trading volume," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 11(4), pages 331-359, November.
  3. Clifford P. Stephens & Michael S. Weisbach, 1998. "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance, American Finance Association, American Finance Association, vol. 53(1), pages 313-333, 02.
  4. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1015, Cowles Foundation for Research in Economics, Yale University.
  5. John D. Lyon & Brad M. Barber & Chih-Ling Tsai, 1999. "Improved Methods for Tests of Long-Run Abnormal Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 54(1), pages 165-201, 02.
  6. Dirk Jenter & Katharina Lewellen & Jerold B. Warner, 2011. "Security Issue Timing: What Do Managers Know, and When Do They Know It?," Journal of Finance, American Finance Association, American Finance Association, vol. 66(2), pages 413-443, 04.
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Cited by:
  1. Dirk Jenter & Katharina Lewellen & Jerold B. Warner, 2011. "Security Issue Timing: What Do Managers Know, and When Do They Know It?," Journal of Finance, American Finance Association, American Finance Association, vol. 66(2), pages 413-443, 04.
  2. William Terando & Wayne Shaw & David Smith, 2007. "Valuation and classification of company issued cash and share-puts," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 29(3), pages 223-240, October.

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