Derivative Gamma Exposure and Underlying Asset Variance

Project: Research

View graph of relations

Description

Derivative contract trading can change the properties of the underlying asset return process. These effects are appreciated by market practitioners but under appreciated in the academic literature, so there is a gap in our understanding of feedback effects from derivative markets to underlying asset markets. Simple models of option pricing which reflect the economics of financial market intermediation make rich predictions about the exact conditions which give rise to option markets changing the properties of stock markets. The direction and magnitude of this effect can be captured by the sign and size of market makers gamma exposure. In this proposal I suggest how to formally test the hypothesis of whether trader gamma-exposure can affect the volatlity of the underlying asset. 

Detail(s)

Project number9048196
Grant typeECS
StatusNot started
Effective start/end date1/01/21 → …