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On the demand pressure hypothesis in option markets: the case of a redundant option

Bennour, Khaled (2011): On the demand pressure hypothesis in option markets: the case of a redundant option.

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Abstract

Gârleanu et al. (RFS 2009) show that a demand pressure phenomenon exists in option markets due to limit to arbitrage. They assert that if arbitrage is perfect, option demand does not impact option price. In this note we show that there is a positive relation between the demand for a redundant option and the option price, which is related to the beliefs of constrained investors regarding future payoffs.

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