Modeling stock pinning
This paper investigates the effect of hedging strategies on the so-called pinning effect, i.e. the tendency of stock's prices to close near the strike price of heavily traded options as the expiration date nears. In the paper we extend the analysis of Avellaneda and Lipkin, who propose an explanation of stock pinning in terms of delta hedging strategies for long option positions. We adopt a model introduced by Frey and Stremme and show that, under the original assumptions of the model, pinning is driven by two effects: a hedging-dependent drift term that pushes the stock price toward the strike price and a hedging-dependent volatility term that constrains the stock price near the strike as it approaches it. Finally, we show that pinning can be generated by simulating trading in a double auction market. Pinning in the microstructure model is consistent with the Frey and Stremme model when both discrete hedging and stochastic impact are taken into account.
(This abstract was borrowed from another version of this item.)
|Date of creation:||2006|
|Contact details of provider:|| Postal: Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom,|
Phone: +44 (0)20 7040 8500
Web page: http://www.city.ac.uk
More information through EDIRC
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.:
- Challet, Damien & Stinchcombe, Robin, 2001.
"Analyzing and modeling 1+1d markets,"
Physica A: Statistical Mechanics and its Applications,
Elsevier, vol. 300(1), pages 285-299.
- Damien Challet & Robin Stinchcombe, 2001. "Analyzing and modelling 1+1d markets," Papers cond-mat/0106114, arXiv.org, revised Jun 2001.
- Eckhard Platen & Martin Schweizer, 1998. "On Feedback Effects from Hedging Derivatives," Mathematical Finance, Wiley Blackwell, vol. 8(1), pages 67-84.
- Jean-Philippe Bouchaud & Marc Mezard & Marc Potters, 2002. "Statistical properties of stock order books: empirical results and models," Quantitative Finance, Taylor & Francis Journals, vol. 2(4), pages 251-256.
- Kempf, Alexander & Korn, Olaf, 1999. "Market depth and order size1," Journal of Financial Markets, Elsevier, vol. 2(1), pages 29-48, February.
- Giulia Iori & Carl Chiarella, 2002. "A simple microstructure model of double auction markets," Computing in Economics and Finance 2002 44, Society for Computational Economics.
- Marco Avellaneda & Michael Lipkin, 2003. "A market-induced mechanism for stock pinning," Quantitative Finance, Taylor & Francis Journals, vol. 3(6), pages 417-425.
- Jean-Philippe Bouchaud & Marc Mezard & Marc Potters, 2002. "Statistical properties of stock order books: empirical results and models," Science & Finance (CFM) working paper archive 0203511, Science & Finance, Capital Fund Management.
- 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. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:cty:dpaper:06/04. 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: (Research Publications Librarian)
If references are entirely missing, you can add them using this form.