IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Optimal Financial-Market Integration and Security Design

  • Viral V. Acharya

    (London Business School and Center for Economic Policy Research (CEPR))

  • Alberto Bisin

    (New York University)

We study 2-period pure-exchange Capital Asset Pricing Model (CAPM) economies with incomplete financial markets and restricted participation. We characterize the optimal financial-market structure and efficient innovations consisting of both the introduction of new assets and the integration of segmented markets. Welfare gains from innovations are maximal when the endowments of affected agents are negatively correlated. Uncoordinated innovations lead to efficient market structures if all assets have identical participation structure or the markets being integrated trade identical assets. However, coordination failure in the introduction of new assets may result when assets have participation structures that overlap only partially.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://dx.doi.org/10.1086/497041
File Function: main text
Download Restriction: Access to the online full text or PDF requires a subscription.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 6 (November)
Pages: 2397-2434

as
in new window

Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2397-2434
Contact details of provider: Web page: http://www.journals.uchicago.edu/JB/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
  2. Madan, Dilip & Soubra, Badih, 1991. "Design and Marketing of Financial Products," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 361-84.
  3. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, vol. 82(1), pages 19-45, September.
  4. Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
  5. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-55, September.
  6. Mann, Catherine L. & Meade, Ellen E., 2002. "Home bias, transactions costs, and prospects for the Euro: A more detailed analysis," Research Notes 6, Deutsche Bank Research.
  7. Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2002. "Optimal Currency Areas," NBER Working Papers 9072, National Bureau of Economic Research, Inc.
    • Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2003. "Optimal Currency Areas," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 301-356 National Bureau of Economic Research, Inc.
  8. Wincoop, Eric van, 1994. "Welfare gains from international risksharing," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 175-200, October.
  9. Stefano G. Athanasoulis & Robert J. Shiller, 1999. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities," Cowles Foundation Discussion Papers 1239, Cowles Foundation for Research in Economics, Yale University.
  10. Jun-Koo Kang & Rene M. Stulz, 1995. "Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan," NBER Working Papers 5166, National Bureau of Economic Research, Inc.
  11. Alberto Alesina & Enrico Spolaore & Romain Wacziarg, 1997. "Economic Integration and Political Disintegration," NBER Working Papers 6163, National Bureau of Economic Research, Inc.
  12. Douglas W. Diamond, . "Liquidity, Banks and Markets," CRSP working papers 326, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  13. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
  14. Tufano, Peter, 1989. "Financial innovation and first-mover advantages," Journal of Financial Economics, Elsevier, vol. 25(2), pages 213-240, December.
  15. Wolfgang Pesendorfer, 1991. "Financial Innovation in a General Equilibrium Model," UCLA Economics Working Papers 635, UCLA Department of Economics.
  16. John Heaton & Deborah J. Lucas, 2000. "Stock prices and fundamentals," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  17. Ross, Stephen A, 1989. " Institutional Markets, Financial Marketing, and Financial Innovation," Journal of Finance, American Finance Association, vol. 44(3), pages 541-56, July.
  18. Athanasoulis, Stefano G & Shiller, Robert J, 2000. "The Significance of the Market Portfolio," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 301-29.
  19. Helpman, Elhanan & Razin, Assaf, 1982. "A Comparison of Exchange Rate Regimes in the Presence of Imperfect Capital Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(2), pages 365-88, June.
  20. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
  21. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
  22. Neumeyer, P.A., 1995. "Currencies and the Allocation of Risk: The Welfare Effect of a Monetary Union," DELTA Working Papers 95-27, DELTA (Ecole normale supérieure).
  23. Dow, James, 1998. "Arbitrage, Hedging, and Financial Innovation," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 739-55.
  24. James J. McAndrews & Chris Stefanadis, 2002. "The consolidation of European stock exchanges," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 8(Jun).
  25. Boot, Arnoud W A & Thakor, Anjan V, 1993. " Security Design," Journal of Finance, American Finance Association, vol. 48(4), pages 1349-78, September.
  26. Gabrielle Demange & Laroque Guy, 1995. "Optimality of Incomplete Markets," Post-Print halshs-00670912, HAL.
  27. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
  28. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
  29. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  30. Glaeser, Edward L. & Kallal, Hedi D., 1997. "Thin Markets, Asymmetric Information, and Mortgage-Backed Securities," Journal of Financial Intermediation, Elsevier, vol. 6(1), pages 64-86, January.
  31. Cuny, Charles J, 1993. "The Role of Liquidity in Futures Market Innovations," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 57-78.
  32. Steven J. Davis & Jeremy Nalewaik & Paul Willen, 2000. "On the Gains to International Trade in Risky Financial Assets," NBER Working Papers 7796, National Bureau of Economic Research, Inc.
  33. Nachman, David C & Noe, Thomas H, 1994. "Optimal Design of Securities under Asymmetric Information," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 1-44.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2397-2434. 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: (Journals Division)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.