Publications

Journal Article

The authors characterize the unique equilibrium in an economy populated by strategic CARA investors who trade multiple risky assets with arbitrarily distributed payoffs.

The authors use their explicit solution to study the joint behavior of illiquidity of option contracts. Option bid-ask spreads are proportional to risk aversion and risk-neutral variances of option payoffs. Spreads may decrease in risk aversion, physical variance, open interest, and increase after earnings announcements in a result contrary to conventional wisdom.

All these predictions are confirmed empirically using a large panel data set of U.S. stock options.