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Equilibrium open interest

Author

Listed:
  • Judd, Kenneth L.
  • Leisen, Dietmar P.J.
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.

Suggested Citation

  • Judd, Kenneth L. & Leisen, Dietmar P.J., 2010. "Equilibrium open interest," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2578-2600, December.
    • Handle: RePEc:eee:dyncon:v:34:y:2010:i:12:p:2578-2600
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    References listed on IDEAS

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