This article investigates effects of direct and indirect product competition on overpricing of discount certificates in Germany. The results indicate that whereas indirect competition reduces overpricing, certificates with direct competitors are more overpriced at their issuance than...

Prices of financial options in a market with liquidity risk are shown to be weak solutions of a class of semilinear parabolic partial differential equations with nonnegative characteristic form. We prove the existence and uniqueness of such solutions, and then show the solutions correspond to...

The cost of systemic risk in the over-the-counter (OTC) derivatives market is described and estimated. Modern portfolio theory (MPT), applied to OTC derivatives, predicts this cost, which has been growing since 1970. This cost grew because Congress blocked MPT's predicted market forces. Without...

In this paper, we consider hedging and pricing of illiquid options on an untradable underlying asset, where an alternative instrument is used as a hedging instrument. We assume that the trade price of the hedging instrument is subject to market impacts caused by the hedger, as well as the...

This paper presents the first theoretical model of the profit maximizing price-setting policy for the issuers of exchange-traded retail certificates. Unlike previous theoretical microstructure models, the market considered is unique in that the market makers do not face significant inventory...

In this paper, we show a self-financing strategy expression in an extended Roch-CJP supply curve model. Liquidity has been a key issue in options hedging especially since the financial crises. The supply curve model developed by Roch and Cetin et al. is one of the widely recognized approaches...

Prediction markets for future events are increasingly common, and they often trade several contracts for the same event. This paper considers the distribution of a normative risk-neutral trader who, given any portfolio of contracts traded on the event, would choose not to reallocate that...

According to the standard analysis of commodity prices, stockpiling is a necessary signature of speculation. This paper develops an approach suggesting that speculation may temporarily push crude oil prices above the level justified by physical-market fundamentals, without necessarily resulting...

We analyze the order flow of discount certificates, its dependence on the product's age, and the implications for issuer pricing behavior. Based on a unique data set of exchange trades and issuer quotes, we find that investors prefer to buy products that mature in just over 1 year from the...

We analyze the price impact of sentimental bettor preferences within a bookmaker betting market. A theoretical model demonstrates that, under reasonable assumptions about the nature of demand in a market with strong competition, the bookmaker will offer lower prices for bets with comparatively...