Digital contracts and price manipulation

Research output: Contribution to journalReview article

2 Citations (Scopus)

Abstract

Corporate insiders holding derivative contracts on their firm's stock have an incentive to engage in stock price manipulation. I examine several derivative contracts susceptible to manipulation and the price impact of the insiders' strategic behavior. Digital contracts, the basic building blocks for valuing complex financial derivatives, are vulnerable to manipulation. The impact of the strategies from holding digital contracts is consistent with an implied volatility skew and volatility clustering. Even seemingly innocuous derivatives, such as ordinary bull spreads, generate these manipulation incentives. This has strong implications for corporate policy, since firms often use option spreads in their stock repurchase programs.

Original languageEnglish (US)
Pages (from-to)1891-1915
Number of pages25
JournalJournal of Business
Volume78
Issue number5
DOIs
StatePublished - Sep 1 2005

Fingerprint

Manipulation
Incentives
Derivative
Financial Derivatives
Volatility Clustering
Implied Volatility
Stock Prices
Building Blocks
Skew
Price manipulation
Derivatives
Business
Insider

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

Cite this

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Digital contracts and price manipulation. / Vanden, Joel Matthew.

In: Journal of Business, Vol. 78, No. 5, 01.09.2005, p. 1891-1915.

Research output: Contribution to journalReview article

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AB - Corporate insiders holding derivative contracts on their firm's stock have an incentive to engage in stock price manipulation. I examine several derivative contracts susceptible to manipulation and the price impact of the insiders' strategic behavior. Digital contracts, the basic building blocks for valuing complex financial derivatives, are vulnerable to manipulation. The impact of the strategies from holding digital contracts is consistent with an implied volatility skew and volatility clustering. Even seemingly innocuous derivatives, such as ordinary bull spreads, generate these manipulation incentives. This has strong implications for corporate policy, since firms often use option spreads in their stock repurchase programs.

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