How to Design a Derivatives Market?

Bastien Baldacci, Paul Jusselin and Mathieu Rosenbaum

Chapter 19 in Peter Carr Gedenkschrift:Research Advances in Mathematical Finance, 2023, pp 657-699 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We consider the problem of designing a derivatives exchange aiming at addressing clients’ needs in terms of listed options and providing suitable liquidity. We proceed into two steps: First, we use a quantization method to select the options that should be displayed by the exchange. Then, using a principal–agent approach, we design a make-take fees contract between the exchange and the market maker. The role of this contract is to provide incentives to the market maker so that he offers small spreads for the whole range of listed options, hence attracting transactions and meeting the commercial requirements of the exchange.

Keywords: Mathematical Finance; Quantitative Finance; Option Pricing; Derivatives; No Arbitrage; Asset Price Bubbles; Asset Pricing; Equilibrium; Volatility; Diffusion Processes; Jump Processes; Stochastic Integration; Trading Strategies; Portfolio Theory; Optimization; Securities; Bonds; Commodities; Futures (search for similar items in EconPapers)
JEL-codes: C02 C6 (search for similar items in EconPapers)
Date: 2023
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