Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099226 | Journal of Economic Dynamics and Control | 2010 | 23 Pages |
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.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Kenneth L. Judd, Dietmar P.J. Leisen,