Borrowing Constraint and the Effect of Option Introduction

Amira, Khaled and Bennour, Khaled (2010): Borrowing Constraint and the Effect of Option Introduction.

Abstract

This paper studies how options trading, by circumventing constraints on borrowing, permits optimistic investors to hold the desired portfolio. Unconstrained investors proceed to a portfolio rebalancing by constructing a zero-income portfolio that consists of a short position in the option, a long position in the stock and a short position in the riskless asset. We show that aggregate demand for the stock is what prevails when options do not exist and no constraints hold. Furthermore, the option listing causes an increase in the aggregate demand for the stock and consequently an increase in the equilibrium stock price.

• Item Type: MPRA Paper
• Language: English
• Keywords: options; credit constraints; stock price; arbitrage
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

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