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Financial Super-Markets: Size Matters for Asset Trade

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  • Philippe Martin

    (CERAS-ENPC, Paris, & CEPR)

  • H=E9l=E8ne Rey=

    (London=20 School of Economics & CEPR)

Abstract

This paper presents a new theoretical framework to analyze=20 financial markets in an international context. We build a two-country=20 macroeconomic model in which agents are risk averse, assets are imperfect=20 substitutes, the number of financial assets is endogenous, and cross-border= =20 asset trade entails transaction costs. We show that demand effects have=20 important implications for the link between market size, asset prices and=20 financial market development. These effects are consistent with the=20 existing empirical evidence. Due to co-ordination failures, the extent of=20 financial market incompleteness is inefficiently high. We also analyze the= =20 impact of domestic transaction costs and issuing costs on financial markets= =20 and returns.

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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0012001.

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Length: 28 pages
Date of creation: 09 Feb 2001
Date of revision:
Handle: RePEc:wpa:wuwpif:0012001

Note: 28 pages, Acrobat .pdf
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Web page: http://128.118.178.162

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