Do hedging instruments stabilize markets?

Florian Wagener, William Brock and Cars Hommes

No 94, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: There is a general argument saying that adding derivative securities (options) to a financial market makes the market more efficient, and has therefore a stabilising effect. We investigate this claim by adding Arrow securities on future states of the world in the asset pricing model with heterogeneous beliefs of Brock and Hommes (1998). We also extend the model to an overlapping generations general equilibrium setting with consumption. The fitness measure underlying the evolutionary switching of investment strategies is realized utility averaged over the different states of the economy. Agents differ in their beliefs about the future market price of the risky asset. If they do not pay much attention to how well other strategies perform, the fundamental equilibrium price is stable; if however agents are sensitive to differences in fitness stability is lost. We investigate whether the introduction of Arrow securities stabilises or destabilises the market, that is, whether the fundamental steady state loses stability sooner or later.

Keywords: heterogeneous agents; evolutionary dynamics; hedging instruments (search for similar items in EconPapers)
JEL-codes: E32 G12 G13 (search for similar items in EconPapers)
Date: 2004-08-11
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:94

Access Statistics for this paper

More papers in Computing in Economics and Finance 2004 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().