Prices and volumes of options: A simple theory of risk sharing when markets are incomplete
We present a simple theory of business-cycle movements of option prices and volumes. This theory relies on time-varying heterogeneity between agents in their demand for insurance against aggregate risk. Formally, we build an infinite-horizon model where agents face an aggregate risk, but also different levels of idiosyncratic risk. We manage to characterize analytically 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 also carry out welfare analysis with respect to the introduction of options, which appears not to be Pareto-improving.
|Date of creation:||2010|
|Date of revision:|
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- Toshihiko Mukoyama & Anthony A. Smith & Per Krusell, 2008.
"Asset Prices in a Huggett Economy,"
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- Edouard Challe & François Le Grand & Xavier Ragot, 2013.
"Incomplete markets, liquidation risk, and the term structure of interest rates,"
PSE - Labex "OSE-Ouvrir la Science Economique"
- Challe, Edouard & Le Grand, François & Ragot, Xavier, 2013. "Incomplete markets, liquidation risk, and the term structure of interest rates," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2483-2519.
- Edouard Challe & François Le Grand & Xavier Ragot, 2007. "Incomplete markets, liquidation risk and the term structure of interest rates," PSE Working Papers halshs-00587679, HAL.
- 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.
- 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.
- repec:hal:wpaper:halshs-00587679 is not listed on IDEAS
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