Katrina Ellis, Roni Michaely, Maureen O'Hara, The Accuracy of Trade Classification Rules: Evidence from Nasdaq, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 4 (Dec., 2000), pp. 529-551

This paper examines aftermarket trading of underwriters and unaffiliated market makers in the three‐month period after an IPO. We find that the lead underwriter is always the dominant market maker; he takes substantial inventory positions in the aftermarket trading, and co‐managers play a negligible role in aftermarket trading. The lead underwriter engages in stabilization activity for less successful IPOs, and uses the overallotment option to reduce his inventory risk. Compensation to the underwriter arises primarily from fees, but aftermarket trading does generate positive profits, which are positively related to the degree of underpricing.

ABSTRACT This paper develops static hedges for several exotic options using standard options. The method relies on a relationship between European puts and calls with different strike prices. The analysis allows for constant volatility or for volatility smiles or frowns.