Assistant Professor in Finance at the University of Houston, Bauer College of Business.

CONTACT
University of Houston, Bauer College of Business
4242 Martin Luther King Boulevard, Houston TX 77204
Email: ppederzoli@bauer.uh.edu
Tel:      +1 713 743 4767

RESEARCH

My research investigates the behavior of investors and intermediaries and their strategic interactions in the options market. It aims to uncover the drivers of equilibrium dynamics and their implications for market stability and risk metrics.

1. Early exercise decision in American options with dividends, stochastic volatility and jumps
   (A. Cosma, S. Galluccio, P. Pederzoli, O. Scaillet)
   DLL and Matlab code
   Journal of Financial and Quantitative Analysis, 2020
   2017 Swiss Derivative Award Nomination Prize
   

   Using a fast numerical technique, we investigate a large database of investors’ suboptimal nonexercise of short-maturity American call options on dividend-paying stocks listed on the Dow Jones. The correct modeling of the discrete dividend is essential for a correct calculation of the early exercise boundary, as confirmed by theoretical insights. Pricing with stochastic volatility and jumps instead of the Black–Scholes–Merton benchmark cuts the amount lost by investors through suboptimal exercise by one-quarter. The remaining three-quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise.

2. Identifying Demand Curves in Index Option Markets
   (K. Jacobs, A. T. Mai, P. Pederzoli)
   Management Science, forthcoming
   2022 FMA Best Paper Award in Derivatives and Options
   

   We identify latent demands using a sign-restricted VAR and highlight the bias from treating (equilibrium) net demand as exogenous. Market-maker and end-user demand curves are far from infinitely elastic as assumed by some models, but elasticities exceed existing estimates for equities. Characterizing demand curves provides insights into the structure of index option markets. Deteriorating market conditions are associated with right shifts of the latent demand curves. The ATM (OTM) markets for calls and puts are mainly driven by end-user (market-maker) demand, and end-user (market-maker) ATM (OTM) call option demand predicts S&P500 returns.

3. The Crash Risk in Individual Stocks Embedded in Skewness Swap Returns
   (P. Pederzoli)
   Journal of Financial and Quantitative Analysis, forthcoming
   2019 FMA Best Paper Award in Derivatives and Options
   2017 SFI Best Doctoral Paper Award
   

   This paper investigates crash risk premiums in individual stocks using skewness swaps. These swaps involve buying a stock’s risk-neutral skewness and receiving the realized skewness as a payoff. The strategy’s returns, which measure the skewness risk premium, are found to be consistently large and positive. This suggests investors are concerned about potential crashes in individual stocks and require substantial compensation for bearing this risk. Notably, significant results are mainly observed after the 2007/2009 financial crisis, indicating changes in post-crisis option market dynamics. Cross-sectional determinants of skewness swap returns include measures of systematic crash risk and stock overvaluation.

4. Risky Intraday Order Flow and Option Liquidity
   (H. Doshi, P. Pederzoli, A. Sert)
   

   This paper provides a novel analysis of marketwide and exchange-specific trading costs for short- and ultra-short-maturity options. We focus on inventory risk proxies related to order flow distribution and delta-hedging costs. Intraday order flow volatility emerges as the primary driver of spreads, while delta-hedging needs play a secondary role. Leveraging cross-exchange variation, we isolate this effect from broader factors that may jointly affect order flow volatility and spreads. The findings support models of active inventory management and suggest that, contrary to standard views, option liquidity providers rely more on trade matching than on delta-hedging to manage inventory risk.

5. Market Makers and the Dynamics of Volatility Demand
   (K. Jacobs, A. T. Mai, P. Pederzoli)
   

   Investors typically are net long volatility to hedge against market downturns, but paradoxically reduce these positions during high-risk periods. We explain this puzzle by estimating the latent demand curves of market-makers and end-users in the zero-net-supply market for VIX options. During high-risk periods, both demand curves shift right, but the shift in market-maker demand dominates that of end-users. This results in reduced net long positions of end-users, high volatility returns on long positions, and wider bid-ask spreads. Market-makers actively manage inventory and profitability while providing market liquidity, increasing demand when inventory constraints bind and when expected volatility returns are high.

6. Non-Linear CAPM: Evidence From In-The-Money Options Trading
   (P. Pederzoli, M. Sandulescu)
   

   We investigate the cross-section of option returns using a model-free approach, by constructing a stochastic discount factor (SDF) that features minimal variance and accounts for frictions. We find that incorporating transaction costs in the form of bid-ask spreads is essential in order to obtain realistic positions in the optimal trading strategy, that mainly invests in in-the-money call options. Empirically, we show that the out-of-sample pricing errors of the constrained SDF are 90% lower than the ones implied by the benchmark unconstrained SDF. Our findings document a strong link between the optimal portfolio accounting for transaction costs and the option positions held by public investors (non-intermediaries). Finally, we show that trading activity of customers in in-the-money call options has significant explanatory power for the cross-section of individual equity option returns.

SEMINARS AND CONFERENCES 

Link to the full list