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Variety and Agglomeration in Financial Markets

Author

Listed:
  • Babus, Ana

Abstract

Financial markets are highly differentiated: firms issue many products beyond stocks and bonds. This variety is consequential because the products firms use determine which issuers raise capital, on what terms, and which risks investors absorb. We propose a model of variety and firms’ allocation across products. Products repackage firms’ cash flows and differ in expected payoff per unit of exposure to aggregate risk and firm-specific risk passed to investors. Aggregate exposure raises the compensation all issuers must offer, whereas firm-specific risk lowers only the issuing firm’s payoff. We show that specialized products coexist with widely adopted ones through trade-offs between these two dimensions.

Suggested Citation

  • Babus, Ana, 2026. "Variety and Agglomeration in Financial Markets," CEPR Discussion Papers 21833, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21833
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    File URL: https://cepr.org/publications/DP21833
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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