An Equilibrium-Based Model Of Stock-Pinning
We consider a model of the economy that splits investors into two groups. One group (the reference traders) trades an underlying asset according to the difference in realized returns between that asset and some evolving consensus estimate of those returns; the other group (hedgers) hedge options, namely straddles, on the underlying asset. We consider the cases when hedgers are long the straddle and when the hedgers are short the straddle. We numerically simulate the terminal distribution of the underlying asset price and find that hedgers that are long the straddle tend to push the underlying toward the strike, while hedgers that are short the straddle cause the underlying security to have a bimodal terminal probability distribution with a local minimum at the strike.
Volume (Year): 10 (2007)
Issue (Month): 03 ()
|Contact details of provider:|| Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml|
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mukarram Attari & Antonio S. Mello & Martin E. Ruckes, 2005. "Arbitraging Arbitrageurs," Journal of Finance, American Finance Association, vol. 60(5), pages 2471-2511, October.
- Mattias Jonsson & Jussi Keppo, 2002. "Option pricing for large agents," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(4), pages 261-272.
- Eckhard Platen & Martin Schweizer, 1998.
"On Feedback Effects from Hedging Derivatives,"
Wiley Blackwell, vol. 8(1), pages 67-84.
- Marco Avellaneda & Michael Lipkin, 2003. "A market-induced mechanism for stock pinning," Quantitative Finance, Taylor & Francis Journals, vol. 3(6), pages 417-425.
- 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.
When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:10:y:2007:i:03:p:535-555. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim)
If references are entirely missing, you can add them using this form.