Incomplete markets and incentives to set up an options exchange

Franklin Allen, Douglas Gale

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Traditional analyses with incomplete markets take the securities that are traded as exogenous. In this paper we endogenize the market structure by considering incentives to introduce (costly) options exchanges which issue derivative securities. The method of financing the exchange is critical in determining whether the market structure is socially efficient. If the exchange can charge fees to all agents and make every agent's participation a necessary condition for establishing the exchange then the market structure chosen in equilibrium is efficient. However, if either of these conditions is not satisfied then an inefficient market structure may be chosen.

    Original languageEnglish (US)
    Pages (from-to)17-46
    Number of pages30
    JournalThe Geneva Papers on Risk and Insurance Theory
    Volume15
    Issue number1
    DOIs
    StatePublished - Mar 1990

    ASJC Scopus subject areas

    • Accounting
    • Business, Management and Accounting(all)
    • Finance
    • Economics and Econometrics

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