A Macro-Financial Approach to Derivative Volumes

This paper presents a model, where infinitely lived agents face incomplete markets for both aggregate and idiosyncratic risks. In this economy, agents trade derivative assets to diversify the aggregate risk they face. We are able to characterize analytically the general equilibrium, which allows us to explain the informational content of the derivative volumes in the business cycle, from a macro-finance perspective. In addition to the reproduction of stylized facts, we show that the introduction of derivative assets is not Pareto improving: some agents gain whereas others lose.