Information, trade, and derivative securities |
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Authors: | Brennan, MJ Cao, HH |
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Affiliation: | Correspondence: MJ Brennan, Anderson Graduate School of Management, UCLA, Los Angeles, CA 90024, USA |
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Abstract: | 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. |
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