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Prices and volumes of options: A simple theory of risk sharing when markets are incomplete

Author

Listed:
  • Xavier Ragot

    (Banque de France)

  • Francois Le Grand

    (EMLyon Business School)

Abstract

We present a theory of business cycle movements for derivative asset prices and volumes. This theory relies on time-varying heterogeneity among agents in their demand for insurance against aggregate risk. We are able to analytically characterize a general equilibrium in which positive quantities of derivatives are traded. This allows us to explain the informational content of derivative volumes over the business cycle. We reproduce stylized facts about derivative volumes, and perform welfare analysis with respect to the introduction of derivative assets, which notably appears to be not Pareto improving.

Suggested Citation

  • Xavier Ragot & Francois Le Grand, 2010. "Prices and volumes of options: A simple theory of risk sharing when markets are incomplete," 2010 Meeting Papers 300, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:300
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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