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Pricing Derived Securities Under an Edgeworthian Process

Author

Listed:
  • S.Y. Wu

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

  • C.Z. Qin

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

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.

Suggested Citation

  • S.Y. Wu & C.Z. Qin, 1996. "Pricing Derived Securities Under an Edgeworthian Process," Microeconomics 9603001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpmi:9603001
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    References listed on IDEAS

    as
    1. Stephen A. Ross, 1976. "Options and Efficiency," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(1), pages 75-89.
    2. John, Kose, 1984. "Market Resolution and Valuation in Incomplete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(1), pages 29-44, March.
    3. 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 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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