6533b821fe1ef96bd127b768

RESEARCH PRODUCT

Equilibrium open interest

Dietmar LeisenKenneth L. Judd

subject

MicroeconomicsEconomics and EconometricsStylized factControl and OptimizationSkewnessFinancial economicsApplied MathematicsOpen interest (futures)EconomicsPortfolioMutual fund separation theorem

description

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.

yearjournalcountryeditionlanguage
2010-12-01Journal of Economic Dynamics and Control
https://doi.org/10.1016/j.jedc.2010.07.006