Date
Thu, 06 Feb 2025
16:00
Location
L5
Speaker
Jacco Thijssen
Organisation
University of York

This paper shows that a simple sale contract with a collection of options implements the full-information first-best allocation in a variety of continuous-time dynamic adverse selection settings with news. Our model includes as special cases most models in the literature. The implementation result holds regardless of whether news is public (i.e., contractible) or privately observed by the buyer, and it does not require deep pockets on either side of the market. It is an implication of our implementation result that, irrespective of the assumptions on the game played, no agent waits for news to trade in such models. The options here do not play a hedging role and are, thus, not priced using a no-arbitrage argument. Rather, they are priced using a game-theoretic approach.

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