On the demand pressure hypothesis in option markets: the case of a redundant option
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.
|Date of creation:||Mar 2011|
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- Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2005.
"Demand-Based Option Pricing,"
NBER Working Papers
11843, National Bureau of Economic Research, Inc.
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