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 in 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 quot;price-elasticityquot; constant that models price impact
Year of publication: |
[2004]
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Authors: | Avellaneda, Marco |
Other Persons: | Lipkin, Mike (contributor) |
Publisher: |
[2004]: [S.l.] : SSRN |
Description of contents: | Abstract [papers.ssrn.com] |
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