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- W2187469884 abstract "Market makers for financial derivative securities use a variety of hedging strategies to manage their exposure to unfavorable market movements. In this study, we develop a model to analyze the effects of hedging activities by options market makers (OMMs) facing informed trading. The model suggests that the OMMs’ hedging activities motivated by adverse-selection risk lead to wider spreads in both stock and options markets. The hedging effect on spreads is more pronounced in the options market than in the stock market. The effect is larger when the OMMs hedge with the underlying asset than when they do with other options. In addition, hedging activities by the OMMs significantly alter the trading strategies of informed traders. Empirical tests provide evidence consistent with the model in the time-series and cross-sectional contexts. JEL Classification: G10, G14, G29, D82" @default.
- W2187469884 created "2016-06-24" @default.
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- W2187469884 date "2012-01-01" @default.
- W2187469884 modified "2023-09-26" @default.
- W2187469884 title "Hedging by Options Market Makers: Theory and Evidence" @default.
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