Demand-Based Option Pricing
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Date: 04-03-2006
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Lasse Pedersen, New York University
Location: 412 Schapiro CEPSR, Davis Auditorium
ABSTRACT
We model the demand-pressure effect on process when the options cannot be perfectly hedged. The model shows that demand pressure in one option contrast 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 option by an amount proportional to the covariance of their unhedgeable parts.
Empirically, we identify aggregate positions of dealers and end users using an unique database, and show that demand-pressure effects contribute to well-known option-pricing puzzles. Indeed, time-series tests show that demand helps explain the overall expensiveness and skew patterns of both index options and single-stock options.
BIO
Lasse Heje Pedersen is a Charles Schaefer Associate Professor of Finance at the Stern School of Business at NYU, a research fellow at CEPR and NBER, and academic consultant for the Federal Reserve Bank of New York. Professor Pedersen received his Ph.D. from the Stanford Graduate School of Business, and his B.S. and M.S. in Mathematics-Economics from the University of Copenhagen.
Professor Pedersen's research focuses on how security prices are affected by illiquidity. His papers study the impact of liquidity risk, predatory trading, asymmetric information, search and bargaining, short-selling through securities lending, and credit risk. Professor Pedersen has published papers in the Econometrica, Journal of Finance, Journal of Financial Economics, and Review of Financial Studies, and won the NYSE Award for the Best Paper on Equity Trading at the WFA, 2002 and 2003, the Barclays Global Investors Award 2003, and was selected to the Review of Economic Studies Tour, 2001.