A market-induced mechanism for stock pinning
We propose a model to describe stock pinning on option expiration dates. We argue that if the open interest on a particular contract is unusually large, delta-hedging in aggregate by floor market-makers can impact the stock price and drive it to the strike price of the option. We derive a stochastic differential equation for the stock price which has a singular drift that accounts for the price-impact of delta-hedging. According to this model, the stock price has a finite probability of pinning at a strike. We calculate analytically and numerically this probability in terms of the volatility of the stock, the time-to-maturity, the open interest for the option under consideration and a 'price elasticity' constant that models price impact.
Year of publication: |
2003
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Authors: | Avellaneda, Marco ; Lipkin, Michael |
Published in: |
Quantitative Finance. - Taylor & Francis Journals, ISSN 1469-7688. - Vol. 3.2003, 6, p. 417-425
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Publisher: |
Taylor & Francis Journals |
Saved in:
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