Borrowing Constraint and the Effect of Option Introduction
Khaled Amira and
Khaled Bennour ()
MPRA Paper from University Library of Munich, Germany
Abstract:
This paper studies how options trading, by circumventing constraints on borrowing, permits optimistic investors to hold the desired portfolio. Unconstrained investors proceed to a portfolio rebalancing by constructing a zero-income portfolio that consists of a short position in the option, a long position in the stock and a short position in the riskless asset. We show that aggregate demand for the stock is what prevails when options do not exist and no constraints hold. Furthermore, the option listing causes an increase in the aggregate demand for the stock and consequently an increase in the equilibrium stock price.
Keywords: options; credit constraints; stock price; arbitrage (search for similar items in EconPapers)
JEL-codes: G11 G13 (search for similar items in EconPapers)
Date: 2010-10
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:26440
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