Transaction costs and a redundant security: Divergence of individual and social relevance (Q1567196): Difference between revisions
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scientific article
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English | Transaction costs and a redundant security: Divergence of individual and social relevance |
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Transaction costs and a redundant security: Divergence of individual and social relevance (English)
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26 April 2001
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A dynamic model of a security market with two periods is examined. A security that provides a holder with risk-hedging which cannot be replaced by a portfolio of the other securities is named irredundant. A securitywithout this property is called redundant. However, the redundant security may be cheaper than the portfolio having the same risk. The author constructs a dynamic utility maximization model with budget restriction for this case and demonstrates that in the second period a situation with a difference between the equilibrium at the security market and the utility maximizing solution for the individual holder may appear. This effect is illustrated by a concrete example. The author applies methods of functional analysis and proves that the difference between two solutions is robust under some variations of parameters of the initial model.
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security market
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transaction costs
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pecuniary externality
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