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On the demand pressure hypothesis in option markets: the case of a redundant option

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  • Bennour, Khaled

Abstract

Gârleanu et al. (RFS 2009) show that a demand pressure phenomenon exists in option markets due to limit to arbitrage. They assert that if arbitrage is perfect, option demand does not impact option price. In this note we show that there is a positive relation between the demand for a redundant option and the option price, which is related to the beliefs of constrained investors regarding future payoffs.

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File URL: http://mpra.ub.uni-muenchen.de/52497/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52497.

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Date of creation: Mar 2011
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Handle: RePEc:pra:mprapa:52497

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Keywords: option; demand pressure; credit constraint;

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  1. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2005. "Demand-Based Option Pricing," NBER Working Papers 11843, National Bureau of Economic Research, Inc.
  2. Harris, Lawrence E & Gurel, Eitan, 1986. " Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-29, September.
  3. Ernest N. Biktimirov & Arnold R. Cowan & Bradford D. Jordan, 2004. "Do Demand Curves for Small Stocks Slope Down?," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 27(2), pages 161-178.
  4. Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, vol. 59(2), pages 711-753, 04.
  5. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July.
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