Implications of an Index-Contingent Trading Mechanism

27 Pages Posted: 20 May 1997

See all articles by Avi Wohl

Avi Wohl

Tel Aviv University - Coller School of Management

Shmuel Kandel (deceased)

Deceased

Abstract

This paper analyzes a call market that enables conditioning not only on an asset price, but also on an index (a weighted average of stock prices) that is determined simultaneously with the prices of all assets. We compare two trading systems, with and without index-conditioning, and find that in the system with index-conditioning (i) traders indeed use the facility of index-conditioning, (ii) there is more "depth" (liquidity) in the market, (iii) price fluctuations around "true" values are lower, (iv) expected trading costs of liquidity traders are lower and (v) the expected utility of informed traders is lower than in a system without index-conditioning.

JEL Classification: G13, G14

Suggested Citation

Wohl, Avi and Kandel (deceased), Shmuel, Implications of an Index-Contingent Trading Mechanism. Available at SSRN: https://ssrn.com/abstract=36983 or http://dx.doi.org/10.2139/ssrn.36983

Avi Wohl (Contact Author)

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 6409051 (Phone)

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