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Investor´s Distrust and the Marketing of New Financial Assets

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  • Enrique L. Kawamura

    ()
    (Department of Economics, Universidad de San Andres)

Abstract

In this paper I present a model where a financial intermediary decides to open new security markets and offer them to boundedly rational investors. I show first that, if consumers have downward biased priors about payoffs, then no trade in the new securities may be verified. It is shown that no endogenous variable serves as a credible signal. Hence, only exogenous signals allows inference by investors. Incentives to disclosure depend upon its cost. I analyze this last issue with two-part tariff schemes.

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Bibliographic Info

Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 23.

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Length: 30 pages
Date of creation: Mar 2000
Date of revision: Apr 2004
Publication status: Published in Quarterly Review of Economics and Finance, April 2004, Volume 44, pages 265-295
Handle: RePEc:sad:wpaper:23

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Keywords: Bounded rationality; Financial innovation; Incomplete markets;

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References

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  1. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, Elsevier, vol. 26(1), pages 17-27, February.
  2. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, Econometric Society, vol. 60(1), pages 77-105, January.
  3. Calvet, Laurent & Gonzalez-Eiras, Martin & Sodini, Paolo, 2001. "Financial Innovation, Market Participation and Asset Prices," Working Paper Series in Economics and Finance 464, Stockholm School of Economics.
  4. Demange, G. & Laroque, G., 1992. "Private Information and the Design of Securities," DELTA Working Papers, DELTA (Ecole normale supérieure) 92-22, DELTA (Ecole normale supérieure).
  5. Wolfgang Pesendorfer, 1991. "Financial Innovation in a General Equilibrium Model," UCLA Economics Working Papers, UCLA Department of Economics 635, UCLA Department of Economics.
  6. Franklin Allen & Douglas Gale, 1999. "Innovations in Financial Services, Relationships, and Risk Sharing," Management Science, INFORMS, INFORMS, vol. 45(9), pages 1239-1253, September.
  7. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, Econometric Society, vol. 67(1), pages 65-100, January.
  8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  9. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers, University of California at Berkeley 41, University of California at Berkeley.
  10. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, Elsevier, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  11. Skinner, Douglas J., 1996. "Are disclosures about bank derivatives and employee stock options 'value-relevant'?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 22(1-3), pages 393-405, October.
  12. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
  13. John Geanakoplos, 1989. "Game Theory Without Partitions, and Applications to Speculation and Consensus," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 914, Cowles Foundation for Research in Economics, Yale University.
  14. Franklin Allen & Douglas Gale, 1990. "Incomplete Markets and Incentives to Set Up an Options Exchange*," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 15(1), pages 17-46, March.
  15. Gale, Douglas, 1992. "Standard Securities," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(4), pages 731-55, October.
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Cited by:
  1. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers, Universidad de San Andres, Departamento de Economia 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.

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