Information, Trade, and Derivative Securities

Author(s): Michael J.Brennan and H.Henry Cao

Abstract: hellwig's(1980) model is used to analyze the value of improving trading opportunities by more frequent trading in the underlying asset, or by trading in a derivative asset. Witb multiple trading sessions, uninformed investors behave as rationaltrend folloewes,while more informed investors follow a contrarian strategy. Astrading becomes continuous, Pareto efficiency is achieved. With trading in an appropriate derivative security,Pareto efficiency may be achieved in only a single round of trading. All derivative claims are then priced on Black and Scboles(1973) principles and, in the absence of further supply shocks, no trading will take place in subsequent trading rounds.

Brennan and Cao 1996 RFS.pdf