Asymmetries and the Market for Put Options

69 Pages Posted: 1 Jun 2021 Last revised: 4 Oct 2021

See all articles by Adam Farago

Adam Farago

University of Gothenburg - Centre for Finance

Mariana Khapko

University of Toronto - Finance Area; Swedish House of Finance

Chayawat Ornthanalai

University of Toronto - Rotman School of Management

Date Written: May 31, 2021

Abstract

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

Farago, Adam and Khapko, Mariana and Khapko, Mariana and Ornthanalai, Chayawat, Asymmetries and the Market for Put Options (May 31, 2021). Swedish House of Finance Research Paper No. 21-12, Rotman School of Management Working Paper No. 3856753, Available at SSRN: https://ssrn.com/abstract=3856753 or http://dx.doi.org/10.2139/ssrn.3856753

Adam Farago

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 405 30
Sweden

Mariana Khapko (Contact Author)

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm
Sweden

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Chayawat Ornthanalai

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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