Prices and volumes of options: A simple theory of risk sharing when markets are incomplete
We present a theory of business cycle movements for derivative asset prices and volumes. This theory relies on time-varying heterogeneity among agents in their demand for insurance against aggregate risk. We are able to analytically characterize 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 reproduce stylized facts about derivative volumes, and perform welfare analysis with respect to the introduction of derivative assets, which notably appears to be not Pareto improving.
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- Edouard Challe & François Le Grand & Xavier Ragot, 2013.
"Incomplete markets, liquidation risk, and the term structure of interest rates,"
PSE Working Papers
- 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.
- 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.
- 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.
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"Asset Prices in a Huggett Economy,"
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181, Society for Economic Dynamics.
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