This paper applies a game theory approach to examine the effects of a market structure change in options trading from a monopoly to a Cournot-type oligopoly that occurred in two successive periods on the Montreal exchange. We analyze the intra-day behaviour of option bid-ask spreads and find that cross-listing has a differential impact on spreads, affecting quoted but not effective spreads under oligopoly. We also find that the impact of the change in structure on effective spreads comes mostly from an increase in limit orders and is consistent with a switch from Cournot to Bertrand-type strategic behaviour for such orders. We conclude that market structure effects within an options exchange are enough to realize most of the benefits of inter-market competition even in the context of market thinness.

We generalize the asset dynamics assumptions of Leland (1994b) and Leland and Toft (1996) to a state dependent variance with constant elasticity process (CEV) and obtain analytical solutions for corporate debt and equity value. We use the GMM technique to extract the parameters by fitting the empirical data in the equity and credit default swap markets simultaneously. We find that the elasticity parameter is significantly different from zero for most of the firms and that the CEV model performs much better than the model with constant volatility in both in-sample fittings and out-of-sample predictions of CDS spreads.

We present a new approach to the pricing of catastrophe event (CAT) derivatives that does not assume a fully diversifiable event risk. Instead, we assume that the event occurrence and intensity affect the return of the market portfolio of an agent that trades in the event derivatives. Based on this approach, we derive values for a CAT option and a reinsurance contract on an insurer’s assets using recent results from the option pricing literature. We show that the assumption of unsystematic event risk seriously underprices the CAT option. Last, we present numerical results for our derivatives using real data from hurricane landings in Florida.