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Pricing Derived Securities Under an Edgeworthian Process

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Author Info

  • S.Y. Wu

    (Economics; Univ. of Iowa; Iowa City, Iowa 52242; USA)

  • C.Z. Qin

    (Economics; Univ. of Iowa; Iowa City, Iowa 52242; USA)

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    Abstract

    The purpose of this paper is twofold. First, it introduces a new version of the Edgeworth process with trading activities centered around self- interested enterprising arbitragers; and second, it examines how the prices of the derived securities are determined under this process. We show that the proposed process is stable and the resulting equilibria are Pareto optimal. Pareto optimality notwithstanding, this process has the tendency to distribute the welfare gains resulting from the introduction of derived securities in favor of the arbitragers.

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    Bibliographic Info

    Paper provided by EconWPA in its series Microeconomics with number 9603001.

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    Length: 39 pages
    Date of creation: 01 Mar 1996
    Date of revision:
    Handle: RePEc:wpa:wuwpmi:9603001

    Note: Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 1 file -- handbook (body in WP5.1, 39 pages)
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    1. Ross, Stephen A, 1976. "Options and Efficiency," The Quarterly Journal of Economics, MIT Press, vol. 90(1), pages 75-89, February.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    3. John, Kose, 1984. "Market Resolution and Valuation in Incomplete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 29-44, March.
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