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Open Access Publications from the University of California

Cournot Competition, Financial Option Markets, and Efficiency

  • Author(s): Willems, Bert
  • et al.

Allaz and Vila (1993) show that the existence of futures markets increases the efficiency of markets in a Cournot setting. This paper looks at the efficiency effect of financial options in a similar framework. It shows that the existence of financial options also makes markets more efficient; though to a smaller extent than futures. This is particularly relevant for markets with market power and costly storage, like electricity markets.

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