Non-existence and Inefficiency of Equilibria with American Options
AbstractWe analyze two examples of economies with incomplete financial markets. In the first model we consider a stock and an American put option on the stock. Although there is only one commodity and asset payoffs therefore do not depend on spot prices, we derive robust non-existence of equilibria. In the second model we consider an economy where a stock is the only asset available for trade. We show that it is impossible to complete the market by introducing American put options and that equilibria are inefficient. This example is also robust.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 3 (1993)
Issue (Month): 1 (January)
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
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- Alexandre Baptista, 2000. "Options and Efficiency in Multiperiod Security Markets," Econometric Society World Congress 2000 Contributed Papers 0299, Econometric Society.
- Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2009. "Options trading activity and firm valuation," Journal of Financial Economics, Elsevier, vol. 94(3), pages 345-360, December.
- Baptista, Alexandre M., 2003. "Spanning with American options," Journal of Economic Theory, Elsevier, vol. 110(2), pages 264-289, June.
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