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February 22, 2017

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acarraro

I am not sure that's strictly true...

I have seen several big banks attempt to launch many of the markets you mention. Goldman tried a totalizer based system 10-years ago which would have covered almost all the markets you describe with an built-in market making system. It never gained enough liquidity to get going.

Several fancy bonds have been issued indexed to some of the variable you describe.

I think only governments have the capacity to create such markets and they only adopted linkers in the last 30 years. And governments have generally paid a fairly big premium on issuing them. Argentina issued GDP-linkied warrants and then fiddled with the numbers to reduce pay-outs...

reason

"One point that critics and supporters of markets are both apt to forget is that, when viewed from the perspective of Arrow-Debreu theory, the astonishing thing about markets is how under-developed they are."

Well not really, they cost.

Almar

Another way at looking at the Arrow-Debreu result (that the optimality of competition depends on scurities covering all possible states of the world) is that it is another Arrow impossibility theorem. That is there are reasons why many of the virtually infinite number of such securities do not exist. Therefore, in practice, a purely competitive optimal economy cannot exist.

@Reason mentions cost. To expand his/her comment: many of the required securities involve moral hazard and/or adverse selection. E.g. for me to fully insure against a drop in income should I become unemployed and fail to find a job quickly, the seller of this security would have to be able to be sure I would carry on searching to the maximum possible extent for a new job, despite recieving a full income while I remained unemployed. It is for this reason that the substitute for this security (i.e. state unemployment benefits)never fully replace lost income and, increasingly, have coercive measures and threats to force job-search even where the search is really futile (and therefore a waste of effort).

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