Garleanu, Pedersen, and Poteshman model the demand-pressure effect on prices when options cannot be hedged perfectly.

• Position: Conferences

Garleanu, Pedersen, and Poteshman model the demand-pressure effect on prices when options cannot be hedged perfectly. The model shows that demand pressure in one option contract increases its price by an amount proportional to the variance of the unhedgeable part of the option. Similarly, the demand pressure increases the price of any other option by an amount proportional to the covariance of their unhedgeable parts. Empirically, the authors identify aggregate positions of dealers and end users using a unique...