This paper studies a dynamic model of an imperfectly competitive bid- ask market with a few large and many small traders. Large traders are risk- averse and exchange a risky asset for hedging purposes. The only private information in the model concerns their hedging demands. We find that large...

This paper examines the formation of option transaction prices in an imperfect market where risk-averse dealers face liquidity and informed traders. Because of market imperfections, trading is costly and arbitrage pricing does not apply. Rather, the transaction prices are related to the dealers'...

Within an optimal contracting framework we analyse some important aspects of debt structure: the number of creditors a company borrows from; the allocation of security interests among creditors; and inter-creditor covenants that govern renegotiation of debt contracts. The key to our analysis is...

In this paper, the relationship between excess returns on foreign exchange investment and inflation differentials and a measure of volatility is investigated for the European Monetary System. A high inflation rate relative to Germany leads to a real appreciation relative to the D-mark, which...

In efficient markets the price should reflect the arrival of private information. The mechanism by which this is accomplished is arbitrage. A privately informed trader will engage in costly arbitrage, that is, trade on his knowledge that the price of an asset is different from the fundamental...

One often quoted reason for the incompleteness of financial markets is the fact that an informational asymmetry prevents entrepreneurs to float their company on the market. In fact, the privileged information that the owners have on their firms discourages rational financial investors and thins...

We study the correlation of monthly excess returns for seven major countries over the period 1960-1990. We find that the international covariance and correlation matrices are unstable over time. A multivariate GARCH(1,1) modelling with constant conditional correlation helps capture some of the...

An informed agent - whose welfare depends on two state variables, s1 and s2 - chooses a linear signalling rule that translates his private signal into a public signal. Conditional on the public signal receivers, whose welfare depends on state 1 alone, take actions which affect the informed...

If a stochastically monotone function of asymmetrically informed individuals' expectations of a random vector is common knowledge, than all the individuals must agree on their expectations. This result generalizes the theorem of Nielsen, Brandenburger, Geanakoplos, McKelvey and Page (1989) from...

In this paper we present a two-factor model, which values American crude oil futures options using the spot price and the net marginal convenience yield of crude as the relevant state variable. The model also accounts for a non-stationary market price of convenience yield risk, the value of...