IDEAS home Printed from https://ideas.repec.org/a/ucp/jnlbus/v78y2005i5p1891-1916.html
   My bibliography  Save this article

Digital Contracts and Price Manipulation

Author

Listed:
  • Joel M. Vanden

    (Tuck School of Business, Dartmouth College)

Abstract

Corporate insiders holding derivative contracts on their firm's stock have an incentive to engage in stock price manipulation. I examine several derivative contracts susceptible to manipulation and the price impact of the insiders' strategic behavior. Digital contracts, the basic building blocks for valuing complex financial derivatives, are vulnerable to manipulation. The impact of the strategies from holding digital contracts is consistent with an implied volatility skew and volatility clustering. Even seemingly innocuous derivatives, such as ordinary bull spreads, generate these manipulation incentives. This has strong implications for corporate policy, since firms often use option spreads in their stock repurchase programs.

Suggested Citation

  • Joel M. Vanden, 2005. "Digital Contracts and Price Manipulation," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1891-1916, September.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:5:p:1891-1916
    DOI: 10.1086/431446
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/431446
    File Function: main text
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: https://libkey.io/10.1086/431446?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ulrich Horst & Felix Naujokat, 2008. "Illiquidity and Derivative Valuation," Papers 0901.0091, arXiv.org.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:78:y:2005:i:5:p:1891-1916. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.jstor.org/journal/jbusiness .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.