Asymmetries and the Market for Put Options
Swedish House of Finance Research Paper No. 21-12
69 Pages Posted: 1 Jun 2021 Last revised: 25 Apr 2023
Date Written: May 31, 2021
We study implications of asymmetries in both preferences and fundamentals for put option demand across investors and the resulting market behavior. A heterogenous-agent model populated by investors with asymmetric preferences alongside standard risk-averse agents rationalizes the size and the dynamics of the put option market, the expensiveness of put options, and the link between put option demand and the stock market in equilibrium. Disappointment-averse investors take long positions in put options, but only if their reference point is lower than the certainty equivalent. In the cross-section of options with multiple strikes, disappointment-averse investors’ open interest peaks for the at-the-money contracts.
Keywords: Disappointment Aversion, Options, Equilibrium Asset Demand
JEL Classification: D51, D53, G11, G12, G13
Suggested Citation: Suggested Citation