Identifying Demand and Supply in Index Option Markets

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

Kris Jacobs

Paper Title: Identifying Demand and Supply in Index Option Markets

Speaker: Kris Jacobs, University of Houston. 

Time and Date: 12 – 1 pm, Wednesday 8 March 2023 (Australian Eastern Daylight Time)

Venue: Face-to-face seminar in room CB08.08.004, Level 8, Building 8, University of Technology Sydney, 14-28 Ultimo Rd, Ultimo, Sydney, Australia (Mp of campus)

Abstract:  We identify latent demand and supply in index option markets using a sign-restricted VAR and highlight the bias from treating (equilibrium) net demand as exogenous. Market-maker supply and end-user demand are far from infinitely elastic as assumed by some models, but elasticities are higher than existing estimates from equity markets. As market conditions deteriorate, option demand shifts right and supply shifts left. The ATM (OTM) market is mainly driven by demand (supply), and ATM demand and OTM supply of calls predict option and S&P500 returns. Disentangling supply and demand is essential to understanding the structure of the index option markets. Click here for paper. 

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