Price multipliers in the options market.

A novel line of research suggests that financial assets react to demand similarly to other products; in contrast with the classical view of inelastic demand for financial products.

This new paradigm implies that data on holdings is extremely useful for predicting price changes and creating counterfactual scenarios. Until now, empirical evidence focused on equities and, to a lesser extent, bonds supports the new paradigm. This project focuses on a different asset class, option derivatives.

This financial product has grown exponentially in the last decade due to financial market improvements; therefore, demand has boomed, potentially elevating prices. The main question of this proposal is how much option prices rise due to an increase in demand. A high increase will make these instruments less attractive as hedging devices.

Consequently, the investor base has shifted towards a more speculative base, including retailers whose participation has sky-rocketed in the last decade despite having realized enormous losses over the last few years. We need two main ingredients to assess the effect of demand on prices. First, we need investors' holdings.

In contrast to equities and bonds, regulators in most countries do not require detailed derivative positions.

This grant will use a novel dataset from Brazil, where the regulator forces funds to report all positions on any asset they hold (or short). Second, we need a method to disentangle which price movements are due to changes in demand. This grant will adapt the recently developed method of granular instrumental variables to options.

I will develop this action at Nova SBE in Portugal under the supervision of Prof. M. Ferreira, where I will also receive training and career development to improve my skills. By joining Nova SBE, I will expand my network and strengthen complementary skills. In turn, I will bring my expertise in financial econometrics to significantly expand their research capacity.