A Partial Equilibrium Model of Option Markets

Dietmar P.J. Leisen and Kenneth L. Judd
Authors registered in the RePEc Author Service: Kenneth L. Judd ()

No 219, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: This paper uses an asymptotically valid expansion to derive explicitly agent's individual demand schedules and then the equilibrium allocations in options. Agents derive financial and non-tradeable income over time; they can only partially offset the latter using bonds and stocks and the option increases their risk-spanning possibilities. However the option does not have to complete the market. The paper studies the interaction between demand/prices, analyzes the (necessary) conditions for trade and discusses the importance of heterogeneity. It also looks into the case in which there is only a spanning demand, but no risk-sharing demand in options and explains that teh financial innovation would then "fail," and discusses the conditions under which the option price is determined entirely by distributional characteristics.

Keywords: heterogeneity; equilibrium; demand; supply; prices (search for similar items in EconPapers)
JEL-codes: G13 G12 D52 D58 (search for similar items in EconPapers)
Date: Written 2001-04-01
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Persistent link: http://EconPapers.repec.org/RePEc:sce:scecf1:219

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