IDEAS home Printed from https://ideas.repec.org/a/spr/joecth/v26y2005i1p141-166.html
   My bibliography  Save this article

New financial markets: who gains and who loses

Author

Listed:
  • Paul Willen

Abstract

We evaluate the effects of new financial markets in a two-period incomplete markets model with heterogenous agents. For analytical tractability, we focus on the special case where utility is exponential and risks are normally distributed. We provide a complete characterization of life-cycle consumption and portfolio choice. The effect of new financial markets on individual welfare equals the sum of what we call the portfolio effect and the price effect. The portfolio effect is proportional to the square of the difference between the average exposure to the new asset in the economy and an individual investor’s exposure adjusted for risk aversion. The portfolio effect is always positive and measures the improved ability of investors to transfer consumption across states. The price effect captures the effect on individual welfare of changes in asset prices. We show that new financial markets drive down the prices of all assets which raises the interest rate and thus affects the ability of investors to transfer consumption across time. The price effect is positive for net savers but can be negative for net borrowers. For net borrower households, the price effect can wipe out the portfolio effect and lead to welfare reductions. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Paul Willen, 2005. "New financial markets: who gains and who loses," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(1), pages 141-166, July.
  • Handle: RePEc:spr:joecth:v:26:y:2005:i:1:p:141-166 DOI: 10.1007/s00199-004-0511-7
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00199-004-0511-7
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Carmona, Guilherme, 2008. "An Existence Result for Discontinuous Games," FEUNL Working Paper Series wp530, Universidade Nova de Lisboa, Faculdade de Economia.
    2. Philip J. Reny, 1999. "On the Existence of Pure and Mixed Strategy Nash Equilibria in Discontinuous Games," Econometrica, Econometric Society, vol. 67(5), pages 1029-1056, September.
    3. Bernard Lebrun, 1996. "Existence of an equilibrium in first price auctions (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 421-443.
    4. Leo K. Simon, 1987. "Games with Discontinuous Payoffs," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 569-597.
    5. Michael R. Baye & Guoqiang Tian & Jianxin Zhou, 1993. "Characterizations of the Existence of Equilibria in Games with Discontinuous and Non-quasiconcave Payoffs," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 935-948.
    6. Lebrun, Bernard, 1996. "Existence of an Equilibrium in First Price Auctions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 421-443.
    7. Guilherme Carmona, 2005. "On the existence of equilibria in discontinuous games: three counterexamples," International Journal of Game Theory, Springer;Game Theory Society, pages 181-187.
    8. Luciano I. de Castro, 2008. "Equilibria Existence in Regular Discontinuous Games," Discussion Papers 1463, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    9. Carmona, Guilherme, 2009. "An existence result for discontinuous games," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1333-1340, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Occasional Papers 0705, Banco de España;Occasional Papers Homepage.
    3. Mercereau, Benoit, 2006. "Stock markets and the real exchange rate: An intertemporal approach," Journal of International Money and Finance, Elsevier, pages 1130-1145.
    4. Willems, Bert & Morbee, Joris, 2010. "Market completeness: How options affect hedging and investments in the electricity sector," Energy Economics, Elsevier, vol. 32(4), pages 786-795, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:26:y:2005:i:1:p:141-166. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.