Structured Products Equilibria in Conic Two Price Markets

52 Pages Posted: 20 May 2011 Last revised: 21 Nov 2011

See all articles by Dilip B. Madan

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

Wim Schoutens

KU Leuven - Department of Mathematics

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.

Suggested Citation

Madan, Dilip B. and Schoutens, Wim, Structured Products Equilibria in Conic Two Price Markets (November 20, 2011). Available at SSRN: https://ssrn.com/abstract=1839364 or http://dx.doi.org/10.2139/ssrn.1839364

Dilip B. Madan (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

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