Project description
When demand moves the market
When investors rush to buy a product, prices usually go up. But what if that product is a financial asset? Research suggests that demand influences asset prices more than previously thought. This challenges the long-held belief that financial demand is inelastic. Previous studies focused on stocks and bonds. Supported by the Marie Skłodowska-Curie Actions programme, the OPTDEM project will now explore this phenomenon in the booming market of option derivatives. Led by Nova SBE in Portugal, the project leverages unique data from Brazil and cutting-edge econometric methods to untangle how much rising demand inflates option prices. The findings could explain why many retail investors have suffered large losses and help policymakers better regulate increasingly speculative markets.
Objective
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.
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Keywords
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Project’s keywords as indicated by the project coordinator. Not to be confused with the EuroSciVoc taxonomy (Fields of science)
Programme(s)
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
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HORIZON.1.2 - Marie Skłodowska-Curie Actions (MSCA)
MAIN PROGRAMME
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Topic(s)
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Calls for proposals are divided into topics. A topic defines a specific subject or area for which applicants can submit proposals. The description of a topic comprises its specific scope and the expected impact of the funded project.
Funding Scheme
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Funding scheme (or “Type of Action”) inside a programme with common features. It specifies: the scope of what is funded; the reimbursement rate; specific evaluation criteria to qualify for funding; and the use of simplified forms of costs like lump sums.
HORIZON-TMA-MSCA-PF-EF - HORIZON TMA MSCA Postdoctoral Fellowships - European Fellowships
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Call for proposal
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Procedure for inviting applicants to submit project proposals, with the aim of receiving EU funding.
(opens in new window) HORIZON-MSCA-2024-PF-01
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Net EU financial contribution. The sum of money that the participant receives, deducted by the EU contribution to its linked third party. It considers the distribution of the EU financial contribution between direct beneficiaries of the project and other types of participants, like third-party participants.
1099-085 Lisboa
Portugal
The total costs incurred by this organisation to participate in the project, including direct and indirect costs. This amount is a subset of the overall project budget.