Finance Area Seminar: Alexander Ober

Alexander Ober

Rice University

Intermediary Inventory Risk and the Pricing Kernel

Date: Wednesday, January 21, 2026
Time: 11:30 am - 1:00 pm
Location: Bronfman building, Room 370

All are cordially invited to attend.

Abstract

When market makers are short index options in an intermediary-based pricing model, the pricing kernel is U shaped in market returns. The U shape is driven more by the inability of market makers to perfectly hedge large price movements and less by unhedgeable stochastic volatility risk. The model provides a joint explanation for historically observed U-shaped kernels, large premia for upward and downward jumps in the market, and expensive out-of-the-money calls and puts. Changes in end-user demand since the financial crisis coincide with a disappearance of the U shape in the pricing kernel, as predicted by the model.