Information, Trade, and Derivative Securities

Brennan, Michael J.; Cao, H. Henry

doi:10.2139/ssrn.39822

Download This Paper

Open PDF in Browser

Add Paper to My Library

Information, Trade, and Derivative Securities

54 Pages Posted: 8 Jul 1997

See all articles by Michael J. Brennan

Michael J. Brennan

University of California, Los Angeles (UCLA) - Finance Area

H. Henry Cao

University of North Carolina (UNC) at Chapel Hill - Finance Area

There are 3 versions of this paper

Abstract

Hellwig's (1980) model isused to analyze the value of improvingtrading opportunities by more frequent trading in the underlying asset, or by trading in a derivative asset. With multiple trading sessions, 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 efficiency may be achieved in only a single round of trading. All derivative claims are then priced on Black and Scholes (1973) principles and, in the absence of further supply shocks, no trading will take place in subsequent trading rounds.

JEL Classification: G13, G14

Suggested Citation: Suggested Citation

Brennan, Michael John and Cao, Huining Henry, Information, Trade, and Derivative Securities. Available at SSRN: https://ssrn.com/abstract=39822 or http://dx.doi.org/10.2139/ssrn.39822