Modeling Stock Pinning

12 Pages Posted: 14 Jul 2006

See all articles by Marc Jeannin

Marc Jeannin

affiliation not provided to SSRN

Giulia Iori

City University London - Department of Economics

David Samuel

Royal Bank of Scotland (RBS)

Abstract

The paper investigates the effect of hedging strategies on the so called pinning effect, i.e. the tendency of stock's prices to close near the strike price of heavily traded options as the expiration date nears. In the paper we extend the analysis of Avellaneda and Lipkin (2003) who propose an explanation of stock pinning in terms of delta hedging strategies for long option positions.

We adopt a model introduced by Frey and Stremme (1997) and show that in this case pinning is driven by two effects: a hedging dependent drift term that pushes the stock price toward the strike price and a hedging dependent volatility term that constrains the stock price near the strike as it approaches it.

Finally we show that pinning can be gnerated by dynamic hedging strategies under more realistic market conditions by simulating trading in a double auction model.

Keywords: derivatives, hedging, pinning, market microstructure

Suggested Citation

Jeannin, Marc and Iori, Giulia and Samuel, David, Modeling Stock Pinning. Available at SSRN: https://ssrn.com/abstract=914467 or http://dx.doi.org/10.2139/ssrn.914467

Marc Jeannin

affiliation not provided to SSRN ( email )

No Address Available

Giulia Iori (Contact Author)

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

David Samuel

Royal Bank of Scotland (RBS) ( email )

135 Bishopsgate
London, EC2M 3UR
United Kingdom

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