Heterogeneous Beliefs and the Effect of Replicatable Options on Asset Prices
- 1 July 1996
- journal article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 9 (3) , 723-756
- https://doi.org/10.1093/rfs/9.3.723
Abstract
We present two ways in which trading in a replicatable option can affect the price process of the underlying asset. In the first situation, trading an option that each investor views as pay off redundant breaks a non-fully revealing equilibrium that exists when the option market is absent. The second situation involves a market that is dynamically complete without options, but in which introducing an option market allows self-confirming conjectures of additional uncertainty about the future price of the underlying asset. Heterogeneous beliefs play important though different roles in both situations.Keywords
This publication has 13 references indexed in Scilit:
- Asymmetric Information and OptionsThe Review of Financial Studies, 1993
- An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging StrategiesThe Journal of Business, 1988
- Do Sunspots Matter?Journal of Political Economy, 1983
- On the aggregation of information in competitive marketsJournal of Economic Theory, 1980
- WELFARE ASPECTS OF OPTIONS AND SUPERSHARESThe Journal of Finance, 1978
- Information, futures prices, and stabilizing speculationJournal of Economic Theory, 1978
- Prices of State-Contingent Claims Implicit in Option PricesThe Journal of Business, 1978
- On the Efficiency of Competitive Stock Markets Where Trades Have Diverse InformationThe Journal of Finance, 1976
- The Pricing of Options and Corporate LiabilitiesJournal of Political Economy, 1973
- Theory of Rational Option PricingThe Bell Journal of Economics and Management Science, 1973