The effect of derivative assets on information acquisition and price behavior in a rational expectations equilibrium

This article shows that introducing derivative assets increasesincentives to collect information about asset payoffs. The increasein information collection makes the price of the underlyingasset more informative and causes the expected price to increase.Extending the model to a dynamic setting with multiple riskyassets, we find the introducing derivative assets for one assetincreases the expected prices of positively correlated assetsand reduces price reaction to future earnings announcements.These findings are consistent with the bulk of the empiricalevidence on the relationship between the introduction of derivativeassets and the behavior of asset prices.     

Information, trade, and derivative securities

Hellwig's (1980) model is used to analyze the value of improvingtrading opportunities by more frequent trading in the underlyingasset, or by trading in a derivative asset. With multiple tradingsessions, 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 efficiencymay be achieved in only a single round of trading. All derivativeclaims are then priced on Black and Scholes (1973) principlesand, in the absence of further supply shocks, no trading willtake place in subsequent trading rounds.     

Small is beautiful,but growth is inevitable: experiences of apex institutions in Senegal and Tanzania

This article examines the experiences of two national apex institutions in two sub-Saharan African countries, Senegal and Tanzania, which channel funds to retail microfinance institutions (MFIs). These two national apexes are the Dyna-Enterprises Project and the Small Entrepreneurs Loan Facility (SELF) project, which are functioning in Senegal and Tanzania respectively. Both Dyna and SELF initially started as small-scale apex MFIs and had been conceived with the same vision in mind – facilitation of access to financial services for the poor. The initial implementation focused on provision of credit through MFIs as well as capacity building. The targeted groups of clients are similar, i.e. the disadvantaged, and mostly are women groups in urban or peri-urban areas carrying out general petty trade activities. Like many apex institutions in sub-Saharan Africa, both SELF and Dyna have stimulated demand for more financial support to the poor and have shown potential to be transformed into viable commercial MFIs. This entails expansion in terms of increased number of staff, branches, cost-effective microfinance services, the number and quality of financial products, capacity building, outreach and information services. The current vision of these national apex institutions is to transform into effective, transparent and efficient corporate entities for addressing poverty issues through harnessing and targeting funds to needy areas, while incorporating microfinance best practices.