Structured products equilibria in conic two price markets |
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Authors: | Dilip B Madan Wim Schoutens |
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Institution: | 1. Robert H. Smith School of Business, University of Maryland, Van Munching Hall, College Park, MD, 20742, USA 2. Department of Mathematics, K. U. Leuven, Celestijnenlaan 200 B, 3001, Leuven, Belgium
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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 counter
cash flow held by the market is consistent with a more conservative prespecified set of acceptable risks. We learn that in
equilibrium heterogeneous investors inherit a common hedging objective of maximizing the bid prices of the final structured
product sold to market or equivalently minimizing the ask price of what is bought. |
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Keywords: | |
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