Parimutuel Applications In Finance New Markets for New Risks

by Baron, Ken; Lange, Jeffrey

• ISBN13: 9781403939500
• ISBN10: 1403939500
• Format: Hardcover
• Copyright: 2007-01-15
• Publisher: Palgrave Macmillan

Summary

Financial intermediaries supply derivatives to their customers when they can hedge the exposures from these transactions. A static hedge is typically employed by arranging an offsetting transaction with a different customer or a dynamic hedge by trading in the underlying derivatives. There is however a broad range of uncertain exposures where intermediaries tend not to offer derivatives or risk management products, as they are unable to hedge the resulting exposures. Baron and Lange suggest a parimutuel auction system adapted from the betting industry as a solution to this problem. They introduce the parimutuel mechanism and the modifications required to apply the mechanism to the capital markets. The PDCA auction and its mechanics are analyzed and finally the mathematics behind the system are described and illustrated. Includes a forward by Robert J. Shiller, the Stanley B. Resor Professor of Economics, Yale University

Author Biography

KEN BARON is the Director of Research at Longitude, Inc. He earned a PhD in Statistics from Stanford and a BA in Mathematics from the University of Chicago. Previously, Mr. Baron held posts at Moore Capital, where he was the Director of Quantitative Research and CSFB, where he was a Director in Global Foreign Exchange. JEFFREY LANGE is a co-founder and Director of Longitude, Inc. He earned undergraduate and graduate degrees in Engineering from Stanford University, earned his law degree from Yale, and did his doctoral work in Risk and Insurance at the Wharton School. Before becoming a practitioner in the financial markets, Mr. Lange was on the faculty at the University of Pennsylvania. His previously published research covers law and economics and the term structure of interest rates.

Table of Contents

Parimutuel Wagering * Introduction to Parimutuel Applications in Finance * The Mathematics of Parimutuel Applications in Finance * Mathematical Theorems * Numerical Solution * Techniques