We consider thin financial markets involving a finite number of tradeable securities. Traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the level of risk aversion they reveal through the transaction , thereby impacting prices and allocations. We argue that traders relatively more exposed to market risk tend to submit more elastic demand functions , revealing higher risk tolerance. Non-competitive equilibrium prices and allocations result as an outcome of a game among traders. General sufficient conditions for existence and uniqueness of such equilibrium are provided, with an extensive analysis of two-trader transactions. Even though strategic behaviour causes inefficient social allocations, traders with sufficiently high risk tolerance and/or large initial exposure to market risk obtain more utility surplus in the non-competitive equilibrium, when compared to the competitive one.
We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit , thereby impacting prices and allocations. We argue that traders relatively more exposed to market risk tend to submit more elastic demand functions . Noncompetitive equilibrium prices and allocations result as an outcome of a game among traders. General sufficient conditions for existence and uniqueness of such equilibrium are provided, with an extensive analysis of two-trader transactions. Even though strategic behaviour causes inefficient social allocations, traders with sufficiently high risk tolerance and/or large initial exposure to market risk obtain more utility gain in the noncompetitive equilibrium, when compared to the competitive one.
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financial markets involving a finite number of tradeable securities. Traders
incomplete financial markets, where traders
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level of risk aversion they reveal through the transaction
demand schedules they submit
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, revealing higher risk tolerance. Non-competitive
. Noncompetitive
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surplus in the non-competitive
gain in the noncompetitive