ramsey optimality and a regulatory algorithm for optimal pricing by regulated multiproduct firms abstract this paper describes in a general equilibrium framework an algorithm which determines ramsey optimal prices for a regulated multiproduct monopoly

asymmetric information and options in an extension of the kyle 1985 model of continuous insider trading it is shown that asymmetric information can make it impossible to price options by arbitrage even when an option would appear to be redundant its introduction into the market can cause the volatility of the underlying asset to become stochastic this eliminates the potential for dynamically replicating the option the change in the price process of the asset reflects a change in the information transmitted by volume and prices when the option is traded article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

investor heterogeneity asset pricing and volatility dynamics abstract we provide an explicit characterization of the equilibrium when investors have heterogeneous risk preferences given market completeness investors can achieve full risk sharing thus a representative agent can be constructed though this agent s risk aversion changes over time as the relative wealths of the individual investors change we show that volatility depends on the covariance of aggregate risk aversion and stock returns we find that heterogeneity increases volatility produces volatility clustering arch effects and leverage like effects option prices exhibit implied volatility skews there is predictability and we assess the magnitude of investors hedging demands and trading volume further diversity is beneficial to all agents and entails welfare gains that can be substantial

option volume and stock prices evidence on where informed traders trade this paper investigates the informational role of transactions volume in options markets we develop an asymmetric information model in which informed traders may trade in option or equity markets we show conditions under which informed traders trade options and we investigate the implications of this for the linkage between markets our model predicts an important informational role for the volume of particular types of option trades we empirically test our model s hypotheses with intraday option data our main empirical result is that negative and positive option volumes contain information about future stock prices the information content of trading activity is a subject of widespread interest if trades are correlated with private information then the outcome of the transaction process may portend future movements in price the extension of trading to different venues or to derivative instruments however means that this link between transactions and information need not be easily discernible if there are alternative markets in which informed traders can profit from their information then where informed traders choose to trade may have important implications not only for security p rice movements but for the behavior of related prices as well this suggests that transactions in derivative markets may be an important predictor of future security price movements in this paper we investigate the informational role of transactions volume in options markets for some readers this focus may seem puzzling an option is a derivative security so its price should be dictated unilaterally by the behavior of the stock price this unidirectional linkage is only true however in complete markets if information is impounded into prices by trading then the ability of informed traders to transact in options markets mearns

heterogeneous beliefs and the effect of replicatable options on asset prices we present two ways in which trading in a replicatable option can affect the price process of the underlying asset in the first situation trading an option that each investor views as pay off redundant breaks a non fully revealing equilibrium that exists when the option market is absent the second situation involves a market that is dynamically complete without options but in which introducing an option market allows self confirming conjectures of additional uncertainty about the future price of the underlying asset heterogeneous beliefs play important though different roles in both situations article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

an application of cremer s planning procedure to the optimal commodity taxation problem abstract using a computational technique developed by cremer we present a decentralized procedure which determines optimal commodity taxes iteratively under minimal information requirements this analysis extends the class of non convex optimization problems to which cremer s procedure is applicable

who buys and who sells options the role of options in an economy with background risk abstract in this paper we derive an equilibrium in which some investors buy call put options on the market portfolio while others sell them since investors are assumed to have similar risk averse preferences the demand for these contracts is not explained by differences in the shape of utility functions rather it is the degree to which agents face other non hedgeable background risks that determines their risk taking behavior in the model we show that investors with low or no background risk have a concave sharing rule i e they sell options on the market portfolio whereas investors with high background risk have a convex sharing rule and buy these options journal of economic literature classification numbers d52 d81 g11 g13

spanning and completeness with options the role of ordinary options infacilitating the completion of securities markets is examined in the context of a model of contingent claims sufficiently general to accommodate the continuous distributions of asset pricing theory and option pricing theory in this context it is shown that call options written on a single security approximately span all contingent claims written on this security and that call options written on portfolios of call options on individual primitive securities approximately span all contingent claims that can be written on these primitive securities in the case of simple options explicit formulas are given for the approximating options and porfolios of options these results are applied to the pricing of contingent claims by arbitrage and to irrelevance propositions in corporate finance

welfare effects of financial innovation in incomplete markets economies with several consumption goods abstract we show that in almost every incomplete markets economy with more than one consumption good and with sufficiently many uninsured states of nature at any general equilibrium of this economy it is possible to arbitrarily perturb the equilibrium utilities merely by introducing the appropriate asset making for example all agents worse off this result demonstrates that the examples given by hart on the optimality of equilibrium when the market structure is incomplete j econ theory11 1975 418 443 and others are actually general phenomena and is in sharp contrast to the intuition that innovation since it expands financial opportunities should benefit all agents journal of economic literature classification numbers d52 d60 g10

a general equilibrium analysis of option and stock market interactions the traditional pricing methodology in finance values derivative securities as redundant assets that have no impact on equilibrium prices and allocations this paper demonstrates that when the market is incomplete primary and derivative asset markets generically interact the valuation of derivative and primary security prices depend on the contractual characteristics of the derivative assets available in a version of the mossin mean variance model the authors analyze an equilibrium in which a call option derivative asset is traded and the equilibrium stock price primary asset increases when the options market is opened copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the theory of reform and indian indirect taxes abstract given a set of value judgements an initial state and a model of the economy one can ask whether some feasible tax change would increase welfare we do this by defining the marginal cost in terms of welfare of raising an extra rupee from the i th good the inverse optimum problem is the calculation of non negative welfare weights on households which imply that the initial state is optimum if no such welfare weights exist then a pareto improvement is possible we illustrate the concepts and results using data from the indian economy for 1979 1980 directions of tax reform for a number of specific social welfare functions and for pareto improvements are presented

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

the equilibrium allocation of diffusive and jump risks with heterogeneous agents abstract we study a two agent pure exchange equilibrium subject to both nondiversifiable diffusive and jump risks agents can trade in a financial market consisting of a stock market a money market and an insurance market for jump risk heterogeneity is introduced through different levels of relative risk aversion in the framework of standard expected utility we find the surprising result that the less risk averse agent purchases insurance contracts against jump risk from the more risk averse agent this equilibrium allocation is linked to the non linear wealth sharing rule in such an economy and preserves the wealth effects studied by dumas rev financ stud 2 1989 157 in the case of pure diffusive risk since the benchmark economy with homogeneous agents generates no excess uncertainty in the stock market we study the effect on excess volatility and excess jump size solely due to different levels of relative risk aversion we observe 3 excess uncertainty in jump sizes for a reasonable specification of economic fundamentals

tax reform from the gradient projection viewpoint abstract this paper examines the problems of gradual tax reform desirable small moves of the tax system are determined using the principles of the well known gradient projection algorithm three classical models of public finance are considered for each of them a continuous time dynamic process is exhibited along which the social welfare function increases until convergence to local second best extrema although the selection of trajectories according to the gradient projection method has some arbitrariness it leads to intuitively and economically appealing rules such as a tax reform analog of the classical optimal taxation result on production efficiency

an algorithm for ramsey pricing by multiproduct public firms under incomplete information abstract we consider the problems facing a regulatory authority charged with the responsibility of regulating a multiproduct public firm the regulatory constraint arises in the form of a break even profit constraint a price vector which maximizes social welfare subject to this break even constraint is commonly referred to as a ramsey price vector this paper describes in a general equilibrium framework a regulatory procedure which converges to a ramsey price vector this procedure could be applied to a natural monopoly in a contestable market situation in which the regulator and the firm cooperate to implement ramsey pricing as a limit pricing strategy to prevent incursions from potential entrants

tirole s industrial regulation and organization legacy in economics jean tirole was awarded the 2014 sveriges riksbank prize in economic sciences in memory of alfred nobel for his analysis of market power and regulation this paper provides an overview of some of that work and of his related contributions to game theory

information trade and derivative securities hellwig s 1980 model is used to analyze the value of improving trading opportunities by more frequent trading in the underlying asset or by trading in a derivative asset with multiple trading sessions uninformed investors behave as rational trend followers while more informed investors follow a contrarian strategy as trading becomes continuous pareto efficiency is achieved with trading in an appropriate derivative security pareto efficiency may be achieved in only a single round of trading all derivative claims are then priced on black and scholes 1973 principles and in the absence of further supply shocks no trading will take place in subsequent trading rounds article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

status quo bias in bargaining an extension of the myerson satterthwaite theorem with an application to the coase theorem we use a generalized version of the myerson satterthwaite theorem to study inefficiencies in bilateral bargaining over trade of an indivisible good where there is two sided private information on the valuations we show that when preferences are convex and quasi linear and when the private information represents the magnitude of the utility gain or loss and follows a uniform distribution that the most efficient mechanism always exhibits a bias towards the status quo in the case that utility functions are quadratic in the amount traded we prove that for any incentive compatible direct mechanism there is an expected bias towards the disagreement point in other words for the class of preferences we study there is a strategic advantage to property rights in the coase bargaining setup in the presence of incomplete information

equilibrium open interest abstract this paper analyses what determines an individual investor s risk sharing demand for options and aggregating across investors what the equilibrium demand for options we find that agents trade options to achieve their desired skewness specifically we find that portfolio holdings boil down to a three fund separation theorem that includes a so called skewness portfolio that agents like to attain our analysis indicates also however that the common risk sharing setup used for option demand and pricing is incompatible with a stylized fact about open interest across strikes

spanning and completeness in markets with contingent claims abstract we characterize financial markets that are complete or that contain portfolios which span all measurable functions of a particular asset payoffs either finite and infinite dimensional these results are then employed to describe the extent to which options trading is sufficient to complete markets to investigate the existence of efficient funds and to establish the extent of market completeness required to ensure the unanimity and irrelevance results of modern corporation finance

undominated directions of tax reform abstract this article considers the reform of a commodity tax system consumers preferences over directions of tax reform are constructed from indirect utility functions a wicksellian decision procedure is used to define a dominance relation on the set of directions of change direction x dominates direction y if and only if a everybody prefers x to y or b x is the status quo and at least one person prefers x to y a number of characterizations of undominated directions of change are provided a related unanimity rule procedure which does not single out the status quo for special treatment is also considered particular attention is paid to the issue of whether wicksellian reforms preserve production efficiency remarks on the relationship between this work previous work in optimal taxation theory and social choice theory are also provided

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society