Options and sunspots in a simple monetary economy

Gaetano Antinolfi () and Todd Keister ()

Economic Theory, 1998, vol. 11, issue 2, pages 295-315

Abstract: We study sunspot immunity in a dynamic monetary economy in which consumers are allowed to trade put and call option contracts on the general price level. We define the concept of strong sunspot immunity to characterize economies that have no sunspot equilibria regardless of the number of extrinsic states and their probabilities of occurrence. We show that a small number of option contracts can make an economy strongly sunspot immune. In addition, we demonstrate how asset re-trading opportunities, and the associated capital gains and losses, reduce the number of options needed for this result to obtain.

JEL-codes: D52 D84 E62 G10 (search for similar items in EconPapers)
Date: 1998-01-30
Note: Received: August 13, 1996; revised version: January 20, 1997
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