Equilibrium open interest. (English) Zbl 1200.91112
Summary: 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.
MSC:
| 91B24 | Microeconomic theory (price theory and economic markets) |
| 91G10 | Portfolio theory |
| 91G20 | Derivative securities (option pricing, hedging, etc.) |
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