Information Transmission in Emerging Markets: The Case of a Unique Financing Instrument
AbstractInformation flows are necessary for well-functioning financial markets. However, in many emerging markets, the legal and institutional preconditions for proper information flow are not met. How do such markets respond? We argue that they respond by developing innovative information transmission mechanisms. We identify one such mechanism associated with the evolution of equity markets in South Asia. The mechanism operates through a financing instrument unique to India and Pakistan, called badla in local parlance. We develop a signaling model in which a broker-financier signals his private information to investors by choosing various levels of financing to provide in the badla market for stocks. A fully separating equilibrium exists allowing full discrimination of various types of stocks. Hence, information transmission takes place through this channel.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6714.
Date of creation: 13 Jan 2008
Date of revision:
Signaling; Information Transmission; Separating Equilibrium; Badla-Financing; Emerging Markets;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- G20 - Financial Economics - - Financial Institutions and Services - - - General
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