We analyse an equilibrium model with restricted investor participation in which strategic arbitrageurs play an innovation game and exploit the resulting mispricings by reaping trading profits. Since the equilibrium asset structure is not chosen by a social planner, it is chosen to maximize arbitrage profits and depends therefore realistically upon considerations such as depth, liquidity and gains from trade. In addition, the welfare properties of the resulting asset structure are studied. It is shown that the degree of inefficiency depends upon the heterogeneity of investors. The conjecture of the optimality of ‘Macro Markets’ is analysed formally in this framework.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
4176.
Find related papers by JEL classification: D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation G20 - Financial Economics - - Financial Institutions and Services - - - General
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