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A General Equilibrium Analysis of Option and Stock Market Interactions

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  • Detemple, Jerome B
  • Selden, Larry
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    Abstract

    The traditional pricing methodology in finance values derivative securities as redundant assets that have no impact on equilibrium prices and allocations. This paper demonstrates that, when the market is incomplete, primary and derivative asset markets, generically, interact: the valuation of derivative and primary security prices depend on the contractual characteristics of the derivative assets available. In a version of the Mossin mean-variance model, the authors analyze an equilibrium in which a call option (derivative asset) is traded and the equilibrium stock price (primary asset) increases when the options market is opened. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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    Bibliographic Info

    Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

    Volume (Year): 32 (1991)
    Issue (Month): 2 (May)
    Pages: 279-303

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    Handle: RePEc:ier:iecrev:v:32:y:1991:i:2:p:279-303

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