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Modeling stock pinning

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  • Jeannin, M.
  • Iori, G.
  • Samuel, D.

Abstract

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.
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Suggested Citation

  • Jeannin, M. & Iori, G. & Samuel, D., 2006. "Modeling stock pinning," Working Papers 06/04, Department of Economics, City University London.
    • Handle: RePEc:cty:dpaper:06/04
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Glover, Kristoffer, 2022. "Optimally stopping a Brownian bridge with an unknown pinning time: A Bayesian approach," Stochastic Processes and their Applications, Elsevier, vol. 150(C), pages 919-937.
    2. Bernardo D’Auria & Alessandro Ferriero, 2020. "A Class of Itô Diffusions with Known Terminal Value and Specified Optimal Barrier," Mathematics, MDPI, vol. 8(1), pages 1-14, January.
    3. Yuji Sakurai & Tetsuo Kurosaki, 2020. "A simulation analysis of systemic counterparty risk in over-the-counter derivatives markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(1), pages 243-281, January.
    4. Buis, Boyd & Pieterse-Bloem, Mary & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2024. "Gamma positioning and market quality," Journal of Economic Dynamics and Control, Elsevier, vol. 164(C).
    5. John Armstrong & Claudio Bellani & Damiano Brigo & Thomas Cass, 2021. "Option pricing models without probability: a rough paths approach," Mathematical Finance, Wiley Blackwell, vol. 31(4), pages 1494-1521, October.
    6. Tiziano De Angelis & Alessandro Milazzo, 2019. "Optimal stopping for the exponential of a Brownian bridge," Papers 1904.00075, arXiv.org, revised Nov 2019.
    7. Ekström, Erik & Vaicenavicius, Juozas, 2020. "Optimal stopping of a Brownian bridge with an unknown pinning point," Stochastic Processes and their Applications, Elsevier, vol. 130(2), pages 806-823.
    8. Bernardo D’Auria & Eduardo García-Portugués & Abel Guada, 2020. "Discounted Optimal Stopping of a Brownian Bridge, with Application to American Options under Pinning," Mathematics, MDPI, vol. 8(7), pages 1-27, July.

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