Transaction costs and a redundant security: Divergence of individual and social relevance (Q1567196)

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.