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Market Structure, Security Prices, And Informational Efficiency

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  • HUANG, JENNIFER
  • WANG, JIANG
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    Abstract

    We consider an economy with an incomplete securities market and heterogeneously informed investors. Each investor trades in the market to hedge the risk to his endowment and to speculate on future security payoffs using his private information. We examine the efficiency of the securities market in allocating risk and transmitting information under different market structures, as defined by the set of securities traded in the market. We show that the introduction of derivative securities can decrease the market s efficiency in revealing information on security payoffs, and increase the equity premium and price volatility in the market.

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    Bibliographic Info

    Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

    Volume (Year): 1 (1997)
    Issue (Month): 01 (January)
    Pages: 169-205

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    Handle: RePEc:cup:macdyn:v:1:y:1997:i:01:p:169-205_00

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    Cited by:
    1. Badreddine, Sina & Galariotis, Emilios C. & Holmes, Phil, 2012. "The relevance of information and trading costs in explaining momentum profits: Evidence from optioned and non-optioned stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 589-608.
    2. Bhamra, Harjoat Singh & Uppal, Raman, 2006. "The Effect of Introducing a Non-redundant Derivative on the Volatility of Stock-Market Returns," CEPR Discussion Papers 5726, C.E.P.R. Discussion Papers.

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