| Author: | Kraus, A. Smith, M. |
| Title: | Heterogeneous beliefs and the effect of replicatable options on asset prices. |
| Journal: | Review of Financial Studies
1996 : Fall, VOL. 9:3, p. 723-756 |
| Index terms: | OPTIONS ASSETS OPTION PRICES OPTION VALUATION CAPITAL ASSET PRICING CAPITAL ASSET PRICING |
| Language: | eng |
| Abstract: | The study presents 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 payoff 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. |
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