Split Derivatives: Inside the World’s Most Misunderstood Contract

Derivatives are the “bad boys” of modern finance: exciting, dangerous, and fundamentally misunderstood.  Their supporters defend them as important instruments for measuring, managing, and transferring risk, enhancing both the efficiency and resilience of the financial system.  Their critics label them everything from “socially useless” to “financial weapons of mass destruction” to “the crystal meth of finance.”  They have been singled out by policymakers as one of the catalysts of the global financial crisis.  They have even been condemned by the Pope.  Indeed, in the wake of the crisis, it often seems like everyone who is anyone has an opinion about … Read more

The Mechanisms of Derivatives Market Efficiency

In their influential 1984 article The Mechanisms of Market Efficiency[1], Ron Gilson and Reinier Kraakman put forward a causal framework for understanding how new information becomes incorporated into the price of publicly-traded equity securities. This framework was grounded in the observation that the efficiency of public equity markets is a function of the market for information: how costly it is to acquire, process, and verify and, accordingly, its distribution within the marketplace. For any initial distribution of information, this framework then offered an account of how the trading activities of one or more species of market participants serve … Read more