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International Good Market Segmentation and Financial Market Structure

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Author Info
Basak, Suleyman
Croitoru, Benjamin
Abstract

While financial markets have recently become more complete and international capital flows well liberalized, markets for goods remain segmented. To investigate how more complete security markets may relieve the effects of this segmentation, we examine a series of two-country economies with internationally segmented good markets, distinguished by the available financial securities. We show that, under heterogeneity within countries, the financial structure matters: even with internationally complete financial markets, risk sharing is limited and the equilibrium allocation may be inefficient, depending on the location of the securities. Sufficient conditions for efficiency include complete international financial markets together with liberalized international financial flows. Under these conditions, heterogeneous agents from the same country engage in ‘financial shipping’, using securities as a substitute for the international shipment of goods. This allows them to partially circumvent the segmentation, allowing for efficient risk sharing.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4060.

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Date of creation: Sep 2003
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Handle: RePEc:cpr:ceprdp:4060

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Related research
Keywords: financial innovation; international capital flows; market segmentation; risk sharing;

Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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