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Endogenous formation of security exchanges

Author

Listed:
  • Marta Faias

    (Universidade Nova de Lisboa, FCT and CMA)

  • Jaime Luque

    (University of Wisconsin - Madison)

Abstract

We use club theory for the first time to provide a model of securities exchange (SX) formation. We think of a SX as a local public good that allows its traders to diversify risk by trading their securities with other SX members. In our two-stage equilibrium setting, traders evaluate SXs depending on their risk-sharing possibilities and, given these evaluations, choose the SX they want to join. Security prices can differ among SXs and traders may value SX memberships differently. We establish continuity properties in both stages and show that equilibrium exists for a generic set of economies.

Suggested Citation

  • Marta Faias & Jaime Luque, 2017. "Endogenous formation of security exchanges," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(2), pages 331-355, August.
    • Handle: RePEc:spr:joecth:v:64:y:2017:i:2:d:10.1007_s00199-016-0989-9
    DOI: 10.1007/s00199-016-0989-9
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    More about this item

    Keywords

    Endogenous securities exchange structure; Security prices; Risk sharing; Membership prices; Equilibrium; Club theory;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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