Prices and volumes of options: A simple theory of risk sharing when markets are incomplete
AbstractWe present a theory of business cycle movements for derivative asset prices and volumes. This theory relies on time-varying heterogeneity among agents in their demand for insurance against aggregate risk. We are able to analytically characterize a general equilibrium in which positive quantities of derivatives are traded. This allows us to explain the informational content of derivative volumes over the business cycle. We reproduce stylized facts about derivative volumes, and perform welfare analysis with respect to the introduction of derivative assets, which notably appears to be not Pareto improving.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 300.
Date of creation: 2010
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Other versions of this item:
- Le Grand, F. & Ragot, X., 2010. "Prices and volumes of options: A simple theory of risk sharing when markets are incomplete," Working papers 302, Banque de France.
- G1 - Financial Economics - - General Financial Markets
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Franke, Gunter & Stapleton, Richard C. & Subrahmanyam, Marti G., 1998. "Who Buys and Who Sells Options: The Role of Options in an Economy with Background Risk," Journal of Economic Theory, Elsevier, vol. 82(1), pages 89-109, September.
- Edouard Challe & François Le Grand & Xavier Ragot, 2007.
"Incomplete markets, liquidation risk and the term structure of interest rates,"
PSE Working Papers
- Challe, E. & Le Grand, F. & Ragot, X., 2010. "Incomplete markets, liquidation risk, and the term structure of interest rates," Working papers 301, Banque de France.
- Edouard Challe & François Le Grand & Xavier Ragot, 2013. "Incomplete markets, liquidation risk, and the term structure of interest rates," PSE Working Papers hal-00843147, HAL.
- repec:hal:wpaper:halshs-00587679 is not listed on IDEAS
- Krusell, Per & Mukoyama, Toshihiko & Smith Jr., Anthony A., 2011.
"Asset prices in a Huggett economy,"
Journal of Economic Theory,
Elsevier, vol. 146(3), pages 812-844, May.
- Andrea Buraschi & Alexei Jiltsov, 2006. "Model Uncertainty and Option Markets with Heterogeneous Beliefs," Journal of Finance, American Finance Association, vol. 61(6), pages 2841-2897, December.
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