Disagreement and equilibrium option trading volume

Mark Cassano ()

Review of Derivatives Research, 2002, vol. 5, issue 2, 153-179

Abstract: Using a complete market equilibrium model, we present results concerning the effect disagreement has on equilibrium option trading volume and positioning. We find that if agents agree on volatility, total option volume is independent of wealth distribution and average optimism. We also find option volume increasing in drift disagreement and decreasing in risk aversion and volatility. Pessimists are shown to write most options. With volatility disagreement, the results are less clear; however, we show agents with high volatility beliefs write deep out of the money options and buy close to the money options. Numerical comparative statics are also performed. Copyright Kluwer Academic Publishers 2002

Keywords: Complete markets; heterogeneous beliefs; option trading volume (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1023/A:1016583612942

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