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Monopolistic security design in finance economies

Author

Listed:
  • Karl Schmedders

    () (Kellogg Graduate School of Management, Northwestern University, KGSM-MEDS 5th floor, 2001 Sheridan Rd, Evanston, IL 60208, USA)

Abstract

The purpose of this paper is to analyze endogenous asset innovation by an entrepreneurial exchange owner in a general equilibrium model of incomplete security markets with financial transaction fees. A monopolistic market maker has the technology to introduce a new option into the economy and charge investors proportional transaction fees if they trade on the exchange. The market maker's objective is to choose the security and transaction fee that maximize revenues when opening the exchange. A computational analysis of this problem is necessary since there are no interesting models with closed-form solutions. We compute the price and welfare effects of the option introduction.

Suggested Citation

  • Karl Schmedders, 2001. "Monopolistic security design in finance economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(1), pages 37-72.
  • Handle: RePEc:spr:joecth:v:18:y:2001:i:1:p:37-72
    Note: Received: March 14, 2000; revised version: December 12, 2000
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    References listed on IDEAS

    as
    1. Detemple, Jerome B & Selden, Larry, 1991. "A General Equilibrium Analysis of Option and Stock Market Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 279-303, May.
    2. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, vol. 82(1), pages 19-45, September.
    3. Detemple, Jerome & Jorion, Philippe, 1990. "Option listing and stock returns : An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 781-801, October.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Chiaki Hara, 2010. "Pareto Improvement and Agenda Control of Sequential Financial Innovations," KIER Working Papers 748, Kyoto University, Institute of Economic Research.
    2. Sy-Ming Guu & Kenneth L. Judd, 2001. "Asymptotic methods for asset market equilibrium analysis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(1), pages 127-157.
    3. Hara, Chiaki, 2011. "Pareto improvement and agenda control of sequential financial innovations," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 336-345.

    More about this item

    Keywords

    Incomplete markets; Option introduction; Price effects; Welfare effects.;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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