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Pinning in the S&P 500 Futures

Author

Listed:
  • Benjamin Golez

    () (Universitat Pompeu Fabra, Barcelona, Spain)

  • Jens Carsten Jackwerth

    () (Department of Economics, University of Konstanz, Germany)

Abstract

We document that S&P 500 futures finish in the proximity of the closest strike price more often on days when serial options on S&P 500 futures expire than on other days. The effect is driven by the interplay of market makers' rebalancing of delta hedges due to the time-decay of the hedges as well as in response to reselling (and early exercise) of in-the-money options by individual investors. Consistent with limits to arbitrage, we find that the effect is asymmetric and stronger above the strike price. In line with increased options activity, pinning becomes more pronounced in recent years.

Suggested Citation

  • Benjamin Golez & Jens Carsten Jackwerth, 2010. "Pinning in the S&P 500 Futures," Working Paper Series of the Department of Economics, University of Konstanz 2010-12, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1012
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    File URL: http://www.uni-konstanz.de/FuF/wiwi/workingpaperseries/WP_Jackwerth-Golez-12-10.pdf
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    References listed on IDEAS

    as
    1. Martens, Martin & van Dijk, Dick, 2007. "Measuring volatility with the realized range," Journal of Econometrics, Elsevier, vol. 138(1), pages 181-207, May.
    2. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    3. Marco Avellaneda & Michael Lipkin, 2003. "A market-induced mechanism for stock pinning," Quantitative Finance, Taylor & Francis Journals, vol. 3(6), pages 417-425.
    4. 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.
    5. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Pinning; Futures; Options; Option Expiration; Hedging;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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