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On the demand pressure hypothesis in option markets: the case of a redundant option

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  • Bennour, Khaled

Abstract

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.

Suggested Citation

  • Bennour, Khaled, 2011. "On the demand pressure hypothesis in option markets: the case of a redundant option," MPRA Paper 52497, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:52497
    as

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    File URL: https://mpra.ub.uni-muenchen.de/52497/7/MPRA_paper_52497.pdf
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    References listed on IDEAS

    as
    1. Kang, Jangkoo & Park, Hyoung-Jin, 2008. "The information content of net buying pressure: Evidence from the KOSPI 200 index option market," Journal of Financial Markets, Elsevier, vol. 11(1), pages 36-56, February.
    2. Hal R. Varian, 2000. "Variants in Economic Theory," Books, Edward Elgar Publishing, number 1033.
    3. Harris, Lawrence E & Gurel, Eitan, 1986. "Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-829, September.
    4. repec:bla:jfinan:v:59:y:2004:i:2:p:711-753 is not listed on IDEAS
    5. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    6. Shleifer, Andrei, 1986. "Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-590, July.
    7. Ernest N. Biktimirov & Arnold R. Cowan & Bradford D. Jordan, 2004. "Do Demand Curves for Small Stocks Slope Down?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(2), pages 161-178, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    option; demand pressure; credit constraint;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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