Equilibrium open interest

Kenneth Judd and Dietmar P.J. Leisen

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 12, 2578-2600

Abstract: This paper analyses what determines an individual investor's risk-sharing demand for options and, aggregating across investors, what the equilibrium demand for options. We find that agents trade options to achieve their desired skewness; specifically, we find that portfolio holdings boil down to a three-fund separation theorem that includes a so-called skewness portfolio that agents like to attain. Our analysis indicates also, however, that the common risk-sharing setup used for option demand and pricing is incompatible with a stylized fact about open interest across strikes.

Keywords: Option; demand; Open; interest; Co-skewness; Skewness; preference (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:12:p:2578-2600

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