On derivatives and information costs

Mondher Bellalah

Received 16 October 2002;  revised 9 March 2004;  accepted 9 March 2004.  Available online 26 June 2004.

Abstract

Information plays a central role in capital markets and in the process of asset pricing. The specific features of over-the-counter (OTC) markets require often an investment in information acquisition. Information costs can be defined in the context of Merton's [Merton, R. (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42, 483–510] model of capital market equilibrium with incomplete information