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Financial super-markets: size matters for asset trade

  • Philippe Martin
  • Helene Rey

The paper presents a two-country macroeconomic model in which the number of financial assets is endogenous. Imperfect substitutability of assets and international transaction costs give a comparative advantage to large markets, because of demand effects. Agents have more incentives to undertake risky investments on those markets; they can also diversify risk at a lower cost. Prices of financial assets are higher in the large area because asset markets are broader. We also analyse the impact of domestic transaction costs and issuing costs on financial markets and returns. Our theory has important implications for the pattern of international trade in risky assets.

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File URL: http://eprints.lse.ac.uk/20197/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 20197.

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Length: 24 pages
Date of creation: Mar 2000
Date of revision:
Handle: RePEc:ehl:lserod:20197
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