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Financial Super-Markets: Size Matters for Asset Trade

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  • Philippe Martin
  • Helene Rey

Abstract

We introduce a new theoretical framework to analyze imperfectly competitive financial markets and trade in assets in an international context. We present a two-country macroeconomic model in which agents are risk averse, assets are imperfect substitutes, the number of financial assets is endogenous, and cross-border asset trade entails transaction costs. We show that demand effects have important implications for the link between market size, asset prices and financial market development. These effects are consistent with existing empirical evidence. Due to co-ordination failures, the extent of financial market incompleteness is inefficiently high. We also analyze the impact of domestic transaction costs and issuing costs on financial markets and returns.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8476.

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Date of creation: Sep 2001
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Handle: RePEc:nbr:nberwo:8476

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