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Financial super-markets: size matters for asset trade

  • Martin, Philippe
  • Rey, Helene

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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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 64 (2004)
Issue (Month): 2 (December)
Pages: 335-361

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Handle: RePEc:eee:inecon:v:64:y:2004:i:2:p:335-361
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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