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MARKET STRUCTURE, SECURITY PRICES, AND INFORMATIONAL EFFICIENCY

Published online by Cambridge University Press:  02 March 2005

JENNIFER HUANG  and
JIANG WANG
JENNIFER HUANG
Affiliation:
Sloan School of Management, Massachusetts Institute of Technology
JIANG WANG
Affiliation:
Sloan School of Management, Massachusetts Institute of Technology and National Bureau of Economic Research
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Extract

We consider an economy with an incomplete securities market and heterogeneously informed investors. Each investor trades in the market to hedge the risk to his endowment and to speculate on future security payoffs using his private information. We examine the efficiency of the securities market in allocating risk and transmitting information under different market structures, as defined by the set of securities traded in the market. We show that the introduction of derivative securities can decrease the market's efficiency in revealing information on security payoffs, and increase the equity premium and price volatility in the market.

Keywords

Securities MarketMarket StructureSecurity PricesCommunication Efficiency
Type
Research Article
Information
Macroeconomic Dynamics , Volume 1 , Issue 1 , January 1997 , pp. 169 - 205
Copyright
© 1997 Cambridge University Press

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