Pricing Derived Securities Under an Edgeworthian Process

S.Y. Wu and C.Z. Qin
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S.Y. Wu: Economics; Univ. of Iowa; Iowa City, Iowa 52242; USA
C.Z. Qin: Economics; Univ. of Iowa; Iowa City, Iowa 52242; USA

Microeconomics from University Library of Munich, Germany

Abstract: The purpose of this paper is twofold. First, it introduces a new version of the Edgeworth process with trading activities centered around self- interested enterprising arbitragers; and second, it examines how the prices of the derived securities are determined under this process. We show that the proposed process is stable and the resulting equilibria are Pareto optimal. Pareto optimality notwithstanding, this process has the tendency to distribute the welfare gains resulting from the introduction of derived securities in favor of the arbitragers.

JEL-codes: D1 D2 D3 D4 (search for similar items in EconPapers)
Pages: 39 pages
Date: 1996-03-01
Note: Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 1 file -- handbook (body in WP5.1, 39 pages)
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