A Partial Equilibrium Model of Option Markets
AbstractThis paper uses an asymptotically valid expansion to derive explicitly agent's individual demand schedules and then the equilibrium allocations in options. Agents derive financial and non-tradeable income over time; they can only partially offset the latter using bonds and stocks and the option increases their risk-spanning possibilities. However the option does not have to complete the market. The paper studies the interaction between demand/prices, analyzes the (necessary) conditions for trade and discusses the importance of heterogeneity. It also looks into the case in which there is only a spanning demand, but no risk-sharing demand in options and explains that teh financial innovation would then "fail," and discusses the conditions under which the option price is determined entirely by distributional characteristics.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 219.
Date of creation: 01 Apr 2001
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heterogeneity; equilibrium; demand; supply; prices;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
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- Niehaus, Frank, 2001.
"The Influence of Heterogeneous Preferences on Asset Prices in an Incomplete Market Model,"
Diskussionspapiere der Wirtschaftswissenschaftlichen FakultÃÂ¤t der Leibniz UniversitÃÂ¤t Hannover
dp-234, Leibniz UniversitÃ¤t Hannover, Wirtschaftswissenschaftliche FakultÃ¤t.
- Frank Niehaus, 2001. "The Influence of Heterogeneous Preferences on Asset Prices in an Incomplete Market Model," CeNDEF Workshop Papers, January 2001 2A.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- Frank Niehaus, 2001. "The Influence of Heterogeneous Preferences on Asset Prices in an Incomplete Market Model," Computing in Economics and Finance 2001 60, Society for Computational Economics.
- Sohnke M. Bartram & Frank R. Fehle, 2003. "Alternative Market Structures for Derivatives," Finance 0311007, EconWPA, revised 12 Dec 2003.
- Sohnke M. Bartram & Frank R. Fehle, 2003. "Competition among Alternative Option Market Structures: Evidence from Eurex vs. Euwax," Finance 0307005, EconWPA, revised 24 Jul 2003.
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