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Strategic Financial Innovation in Segmented Markets

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  • Rohit Rahi
  • Jean-Pierre Zigrand

Abstract

We study an equilibrium model with restricted investor participation in which strategic arbitrageurs reap profits by exploiting mispricings across different market segments. We endogenize the asset structure as the outcome of a security design game played by the arbitrageurs. The equilibrium asset structure depends realistically upon considerations such as depth and gains from trade. It is neither complete nor socially optimal in general; the degree of inefficiency depends upon the heterogeneity of investors. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Rohit Rahi & Jean-Pierre Zigrand, 2009. "Strategic Financial Innovation in Segmented Markets," Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 2941-2971, August.
  • Handle: RePEc:oup:rfinst:v:22:y:2009:i:8:p:2941-2971
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michail Anthropelos & Constantinos Kardaras, 2014. "Equilibrium in risk-sharing games," Papers 1412.4208, arXiv.org, revised Jul 2016.
    2. Chiaki Hara, 2010. "Pareto Improvement and Agenda Control of Sequential Financial Innovations," KIER Working Papers 748, Kyoto University, Institute of Economic Research.
    3. Büyükşahin, Bahattin & Robe, Michel A., 2014. "Speculators, commodities and cross-market linkages," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 38-70.
    4. Beck, Thorsten & Chen, Tao & Lin, Chen & Song, Frank M., 2016. "Financial innovation: The bright and the dark sides," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 28-51.
    5. Zhang, Yue, 2015. "The securitization of gold and its potential impact on gold stocks," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 309-326.
    6. Rahi, Rohit & Zigrand, Jean-Pierre, 2008. "Arbitrage networks," LSE Research Online Documents on Economics 4787, London School of Economics and Political Science, LSE Library.
    7. Rahi, Rohit & Zigrand, Jean-Pierre, 2013. "Walrasian foundations for equilibria in segmented markets," LSE Research Online Documents on Economics 62008, London School of Economics and Political Science, LSE Library.
    8. Alzahrani, Mohammed & Masih, Mansur & Al-Titi, Omar, 2014. "Linear and non-linear Granger causality between oil spot and futures prices: A wavelet based test," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 175-201.
    9. Rahi, Rohit & Zigrand, Jean-Pierre, 2007. "A theory of strategic intermediation and endogenous liquidity," LSE Research Online Documents on Economics 4764, London School of Economics and Political Science, LSE Library.
    10. Hara, Chiaki, 2011. "Pareto improvement and agenda control of sequential financial innovations," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 336-345.
    11. Rahi, Rohit & Zigrand, Jean-Pierre, 2013. "Market quality and contagion in fragmented markets," LSE Research Online Documents on Economics 60971, London School of Economics and Political Science, LSE Library.
    12. Rahi, Rohit & Zigrand, Jean-Pierre, 2009. "Endogenous liquidity and contagion," LSE Research Online Documents on Economics 29300, London School of Economics and Political Science, LSE Library.
    13. Michail Anthropelos & Constantinos Kardaras, 2018. "Equilibrium in thin security markets under restricted participation," Papers 1802.09954, arXiv.org.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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