Price Discovery for Options

Semyon Malamud, Michael Tseng and Yuan Zhang
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Semyon Malamud: Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute
Michael Tseng: University of Central Florida
Yuan Zhang: Ecole Polytechnique Fédérale de Lausanne

No 20-66, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We consider a market where traders have asymmetric information regarding the distribution of asset return and study price discovery of derivatives. The informed trader has private information regarding arbitrary higher moments of asset return, such as volatility or skewness, and exploits her private information by trading a complete menu of options. The equilibrium trading strategies of the informed agent in our model reflect those used by traders in the market when trying to exploit higher order moment information, such as the volatility straddle.

Keywords: Options; Price Discovery; Volatility Straddle (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2020-08
New Economics Papers: this item is included in nep-mst and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2066

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