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Mathematical Models for Stock Pinning near Option Expiration Dates
Author(s) -
Avellaneda Marco,
Kasyan Gennady,
Lipkin Michael D.
Publication year - 2012
Publication title -
communications on pure and applied mathematics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.12
H-Index - 115
eISSN - 1097-0312
pISSN - 0010-3640
DOI - 10.1002/cpa.21404
Subject(s) - mathematical economics , computer science , mathematics , library science , operations research
This paper discusses mathematical models in Finance related to feedback between options trading and the dynamics of stock prices. Specifically, we consider the phenomenon of “pinning” of stock prices at option strikes around expiration dates. Pinning at the strike refers to the likelihood that the price of a stock coincides with the strike price of an option written on it immediately before the expiration date of the latter. (See Figure 1 for a diagrammatic description of pinning). Conclusive evidence of stock pinning near option expiration dates was given by Ni, Pearson and Poteshman (2005) [8] based on empirical studies. Theoretical work was done by Krishnan and Nelken (2001) [5], who proposed a model to explain pinning based on the Brownian bridge. Later, Avellaneda and ∗Courant Institute and Finance Concepts LLC †Courant Institute ‡Columbia University and Katama Trading LLC