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Incomplete markets and derivative assets

François Le Grand and Xavier Ragot ()
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François Le Grand: EMLyon Business School

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Abstract: We analyze derivative asset trading in an economy in which agents face both aggregate and uninsurable idiosyncratic risks. Insurance markets are incomplete for idiosyncratic risk and, possibly, for aggregate risk as well. However, agents can exchange insurance against aggregate risk through derivative assets such as options. We present a tractable framework, which allows us to characterize the extent of risk sharing in this environment. We show that incomplete insurance markets can explain some properties of the volume of traded derivative assets, which are difficult to explain in complete market economies.

Keywords: Incomplete markets; Heterogeneous agent models; Imperfect risk sharing; Derivative assets (search for similar items in EconPapers)
JEL-codes: G1 G12 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ias, nep-mac and nep-rmg
Date: 2015-09
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Published in Economic Theory, 2015, pp.1-29

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Journal Article: Incomplete markets and derivative assets (2016) Downloads
Working Paper: Incomplete markets and derivative assets (2016)
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