Structured Products Equilibria in Conic Two Price Markets
52 Pages Posted: 20 May 2011 Last revised: 21 Nov 2011
Date Written: November 20, 2011
Abstract
A novel equilibrium theory is developed for two price markets permitting investors to trade personally designed structured products. Classical market clearing is enhanced for structured products where the market allows these products to be freely bought at ask prices or sold for bid prices. Competitive pressures lead the market to lower the ask prices and raise the bid prices with the market offering individual investors the widest possible set of acceptable risks provided the aggregate cash flow held by the market is consistent with a more conservative set of acceptable risks. In equilibrium heterogeneous investors hedge to maximize bid prices.
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