BFS 2002 |
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Contributed Talk |
Dietmar Leisen, Kenneth Judd
Open interest in a financial contract describes
the total number that are held long. This
information is quoted at the end of each trading
day in addition to price and volume. Our paper
investigates the risk-sharing rationale for
option demand and the resulting shape of the
open interest curve in calls across strikes in
an equilibrium setup.We argue that skewness
of the terminal stock price distribution drives
equilibrium demand in options and that the
observed shape of the open interest curve is the
result of favorable trade-offs between skewness
and variance. We explain that open interest
curves are sensitive to the distributional
assumptions made for the underlying security;
an analysis of open interest in addition to
price and volume could therefore enrich current
empirical studies.