Abstract
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.
Original language | English (US) |
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Pages (from-to) | 417-425 |
Number of pages | 9 |
Journal | Quantitative Finance |
Volume | 3 |
Issue number | 6 |
DOIs | |
State | Published - Dec 2003 |
ASJC Scopus subject areas
- Finance
- Economics, Econometrics and Finance(all)