Information, Trade, and Derivative Securities

REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 1

Posted: 17 Oct 1995

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

Multiple version iconThere are 3 versions of this paper

Abstract

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

Brennan, Michael John and Cao, Huining Henry, Information, Trade, and Derivative Securities. REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 1. Available at SSRN: https://ssrn.com/abstract=6873

Michael John Brennan (Contact Author)

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

Los Angeles, CA 90095-1481
United States
310-825 3587 (Phone)
310-206 8419 (Fax)

Huining Henry Cao

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

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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