Information, Trade, and Derivative Securities
REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 1
Posted: 17 Oct 1995
Hellwig's (1980) model is used to analyze the value of improving trading 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-Scholes principles and, in the absence of further supply shocks, no trading will take place in subsequent trading rounds.
JEL Classification: G14
Suggested Citation: Suggested Citation