Equilibrium bid-ask spread of European derivatives in dry markets

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Abstract

In the framework of incomplete markets, due to the non-existence of trade at some points in time, and using a partial equilibrium analysis, we show how the bid-ask spread of an European derivative is generated. We also find conditons for the existence of the spread. These conditions concern the market structure of the maret-makers, which can be a oligolopoly with price competition or a monopoly, as well as the riskaversion of the demand and supply of the market.
Original languageEnglish
JournalSSRN Electronic Journal
DOIs
Publication statusPublished - 19 Feb 2006

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