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Who buys options from whom? The role of options in an economy with heterogeneous

Research output: Working paper

Published
Publication date2000
Place of PublicationLancaster University
PublisherThe Department of Accounting and Finance
Original languageEnglish

Publication series

NameAccounting and Finance Working Paper Series

Abstract

In this paper we first show that call options, together with the market portfolio, are sufficient to obtain Pareto efficiency while put options are not. Next we investigate how investors' heterogeneous preferences and beliefs affect their investment strategies and who buys options from whom. We show that an investor buys options with strike prices below a threshold from investors who have lower cautiousness/optimism while selling options with strike prices above the threshold to investors who have higher cautiousness/optimism. We also show that the investor's threshold increases with increases in his cautiousness and optimism.