|Date: Wednesday, September 09, 2015
Location: 1360 East Hall (4:00 PM to 5:00 PM)
Title: Equilibrium with imbalance of the derivative market
Abstract: We investigate the impact of imbalanced derivative markets - markets in which not all agents hedge - on the underlying stock market. The availability of a closed-form representation for the equilibrium stock price in the context of a complete (imbalanced) market with terminal consumption allows us to study how this equilibrium outcome is affected by the risk aversion of agents and the degree of imbalance. In particular, it is shown that the derivative imbalance leads to significant changes in the equilibrium stock price process: volatility changes from constant to local, while risk premia increase or decrease depending on the replicated contingent claim, and become stochastic processes. Moreover, the model produces implied volatility smile consistent with empirical observations.
Speaker: Yavor Stoev
Event Organizer: Erhan Bayraktar email@example.com