EconPapers    
Economics at your fingertips  
 

Demand-Based Option Pricing

Nicolae Garleanu, Lasse Pedersen and Allen M. Poteshman

Review of Financial Studies, 2009, vol. 22, issue 10, 4259-4299

Abstract: We model demand-pressure effects on option prices. The model shows that demand pressure in one option contract increases its price by an amount proportional to the variance of the unhedgeable part of the option. Similarly, the demand pressure increases the price of any other option by an amount proportional to the covariance of the unhedgeable parts of the two options. Empirically, we identify aggregate positions of dealers and end-users using a unique dataset, and show that demand-pressure effects make a contribution to well-known option-pricing puzzles. Indeed, time-series tests show that demand helps explain the overall expensiveness and skew patterns of index options, and cross-sectional tests show that demand impacts the expensiveness of single-stock options as well. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (140) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhp005 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Demand-Based Option Pricing (2005) Downloads
Working Paper: Demand-Based Option Pricing (2005) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:22:y:2009:i:10:p:4259-4299

Ordering information: This journal article can be ordered from
http://www4.oup.co.uk/revfin/subinfo/

Access Statistics for this article

Review of Financial Studies is currently edited by Maureen O'Hara

More articles in Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().

 
Page updated 2020-05-19
Handle: RePEc:oup:rfinst:v:22:y:2009:i:10:p:4259-4299