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Implications of an Index-Contingent Trading Mechanism

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  • Wohl, Avi
  • Kandel, Shmuel

Abstract

This article analyzes a call market that enables conditioning not only on an asset price but also on an index (a weighted average of stock prices) that is determined simultaneously with the prices of all assets. The authors compare two trading systems, with and without index conditioning, and find that, in the system with index conditioning, traders indeed use the facility of index conditioning, there is more 'depth' (liquidity) in the market, price fluctuations around 'true' values are lower, expected trading costs of liquidity traders are lower, and the expected utility of informed traders is lower than in a system without index conditioning. Copyright 1997 by University of Chicago Press.

Suggested Citation

  • Wohl, Avi & Kandel, Shmuel, 1997. "Implications of an Index-Contingent Trading Mechanism," The Journal of Business, University of Chicago Press, vol. 70(4), pages 471-488, October.
    • Handle: RePEc:ucp:jnlbus:v:70:y:1997:i:4:p:471-88
    DOI: 10.1086/209728
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    Cited by:

    1. Bossaerts, Peter & Fine, Leslie & Ledyard, John, 2002. "Inducing liquidity in thin financial markets through combined-value trading mechanisms," European Economic Review, Elsevier, vol. 46(9), pages 1671-1695, October.
    2. Giovanni Cespa, 2004. "A Comparison of Stock Market Mechanisms," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 803-824, Winter.
    3. Madhavan, Ananth & Panchapagesan, Venkatesh, 2000. "Price Discovery in Auction Markets: A Look Inside the Black Box," The Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 627-658.
    4. Schellhorn, Henry, 2011. "A trading mechanism contingent on several indices," European Journal of Operational Research, Elsevier, vol. 213(3), pages 551-558, September.
    5. Lauterbach, B. & Wohl, A., 2001. "A note on price noises and their correction process: Evidence from two equal-payoff government bonds," Journal of Banking & Finance, Elsevier, vol. 25(3), pages 597-612, March.

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