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Equilibrium open interest

  • Judd, Kenneth L.
  • Leisen, Dietmar P.J.

This paper analyses what determines an individual investor's risk-sharing demand for options and, aggregating across investors, what the equilibrium demand for options. We find that agents trade options to achieve their desired skewness; specifically, we find that portfolio holdings boil down to a three-fund separation theorem that includes a so-called skewness portfolio that agents like to attain. Our analysis indicates also, however, that the common risk-sharing setup used for option demand and pricing is incompatible with a stylized fact about open interest across strikes.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 12 (December)
Pages: 2578-2600

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:12:p:2578-2600
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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