Classic option pricing theory values a derivative contract via dynamic delta hedging and treating the contract as redundant relative to the underlying security. Dynamic delta hedging proves highly effective in practice, but the remaining risk is still large because of the practical limits of arbitrage. Derivatives can play primary roles in risk allocation. This paper quantifies the percentage variance reduction of delta hedging on U.S. stock options, proposes a top-down return attribution framework to identify the remaining risk sources of the delta-hedged option investment, and constructs a statistical return factor model to explain the variations of the delta-hedged option returns

We hypothesize that corporate takeover markets create significant constraints for short sellers. Both short sellers and corporate bidders often target firms with declining economic prospects. Yet, a target firm’s stock price generally increases upon a takeover announcement, resulting in losses for short sellers. Therefore, short sellers should require higher rates of return when the takeover likelihood is higher. Consistent with this prediction, the return predictability of monthly short interest increases with industry-level takeover probability and decreases as takeover defenses are implemented. Our results suggest that efficient takeover markets create trading frictions for short sellers and can therefore inhibit overall market efficiency.

Bitcoin prices are driven by upward as well as downward jumps and so the bitcoin implied volatility surface behaves differently from those of established options markets. We analyze tick-level Deribit option price data, demonstrating increasing support for the limits-to-arbitrage hypothesis. Hence market makers are managing order imbalance and inventory more effectively as Deribit bitcoin options trading volumes increases. On the demand side, volatility traders drive both at-the-money and out-of-the-money option prices, the latter also being driven by directional traders. Directional effects were most pronounced during the price bubble of 2021. Further refinements of our tests assess time-to-maturity and time-of-day effects

Recent research shows that a high wage-gap between managers and workers identifies better-performing firms, but the stock market does not seem to price this information. In this paper, we show that not all investors neglect pay inequality. Using a unique data set on German firms' employee compensation, we find that the mispricing of the wage gap is driven by limits to arbitrage. Specifically, some investors seem to bid up low-wage-gap stocks for non-monetary reasons, thus exhibiting a preference for low pay-inequality. The results suggest that firms with equitable pay schemes are rewarded with a lower cost of capital