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Incomplete markets and derivative assets

Author

Listed:
  • François Legrand

    (EM - EMLyon Business School)

  • Xavier Ragot

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

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.

Suggested Citation

  • François Legrand & Xavier Ragot, 2015. "Incomplete markets and derivative assets," SciencePo Working papers Main halshs-01513312, HAL.
    • Handle: RePEc:hal:spmain:halshs-01513312
    DOI: 10.1007/s00199-015-0912-9
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01513312
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    Cited by:

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    3. Thaddeus Neururer, 2020. "Past managerial guidance and returns to variance trading around earnings announcements," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2995-3031, September.
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    7. Grand, François Le & Ragot, Xavier, 2018. "A class of tractable incomplete-market models for studying asset returns and risk exposure," European Economic Review, Elsevier, vol. 103(C), pages 39-59.
    8. repec:spo:wpmain:info:hdl:2441/6bl2553ksc9vlq1fltjs9h1cht is not listed on IDEAS

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    More about this item

    Keywords

    incomplete markets; heterogeneous agent models; imperfect risk sharing; derivative assets;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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