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Incomplete markets and derivative assets

Author

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  • François Le Grand

    (EMLyon Business School)

  • Xavier Ragot

    (Observatoire français des conjonctures économiques)

Abstract

We analyze derivative asset trading in an economy in which agents face both aggregate and uninsurable idiosyncratic risks. Insurance markets are incomplete for idiosyncratic risk and, possibly, for aggregate risk as well. However, agents can exchange insurance against aggregate risk through derivative assets such as options. We present a tractable framework, which allows us to characterize the extent of risk sharing in this environment. We show that incomplete insurance markets can explain some properties of the volume of traded derivative assets, which are difficult to explain in complete market economies.

Suggested Citation

  • François Le Grand & Xavier Ragot, 2015. "Incomplete markets and derivative assets," Sciences Po publications info:hdl:2441/1p7ctioc2n8, Sciences Po.
    • Handle: RePEc:spo:wpmain:info:hdl:2441/1p7ctioc2n80gp0icks5dssdsa
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    References listed on IDEAS

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    Cited by:

    1. François Le Grand & Xavier Ragot, 2017. "Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks," Working Papers hal-03458683, HAL.
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    3. Grand, François Le & Ragot, Xavier, 2018. "A class of tractable incomplete-market models for studying asset returns and risk exposure," European Economic Review, Elsevier, vol. 103(C), pages 39-59.
    4. François Legrand & Xavier Ragot, 2016. "Optimal policy with heterogeneous agents and aggregate shocks : An application to optimal public debt dynamics," 2016 Meeting Papers 1272, Society for Economic Dynamics.
    5. Thaddeus Neururer, 2020. "Past managerial guidance and returns to variance trading around earnings announcements," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2995-3031, September.
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    More about this item

    Keywords

    Incomplete markets; Heterogeneous agent models; Imperfect risk sharing; Derivative assets;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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