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Strategic Financial Innovation in Segmented Markets

  • Jean-Pierre Zigrand

    ()

  • Rohit Rahi

    ()

We study an equilibrium model with restricted investor participation in which strategic arbitrageurs reap profits by exploiting mispricings across different trading locations.� We edogonize the asset structure as the outcome of the security design game played by the�arbitrageurs.� The equilibrium asset structure depends realistically upon consideration such as depth, liquidity and gains from trade.� It is not socially optimal in general; the degree of inefficiency depends upon the heterogeneity of investors. Finally we use this framework to formally analyse Shiller's conjecture of the optimality 'macro markets'.��

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp520.

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Date of creation: Oct 2004
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Handle: RePEc:fmg:fmgdps:dp520
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Olivier Vigneron, & Xavier Gabaix & Arvind Krishnamurthy, 2004. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," Econometric Society 2004 North American Summer Meetings 430, Econometric Society.
  2. Paul Willen, 2005. "New financial markets: who gains and who loses," Economic Theory, Springer, vol. 26(1), pages 141-166, 07.
  3. Allen, Franklin & Santomero, Anthony M., 1997. "The theory of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1461-1485, December.
  4. 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.
  5. Kevin Dowd & David Blake & Andrew J. G. Cairns & Paul Dawson, 2006. "Survivor Swaps," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 1-17.
  6. JASKOLD GABSZEWICZ, Jean & VIAL, Jean-Philippe, . "Oligopoly "Ã la Cournot" in a general equilibrium analysis," CORE Discussion Papers RP 106, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Tufano, Peter, 1989. "Financial innovation and first-mover advantages," Journal of Financial Economics, Elsevier, vol. 25(2), pages 213-240, December.
  8. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
  9. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
  10. 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.
  11. Franklin Allen, Douglas Gale, 1988. "Optimal Security Design," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 229-263.
  12. Zigrand, Jean-Pierre, 2006. "Endogenous market integration, manipulation and limits to arbitrage," Journal of Mathematical Economics, Elsevier, vol. 42(3), pages 301-314, June.
  13. Zigrand, Jean-Pierre, 2004. "A general equilibrium analysis of strategic arbitrage," Journal of Mathematical Economics, Elsevier, vol. 40(8), pages 923-952, December.
  14. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  15. Massa, Massimo & Peyer, Urs & Tong, Zhenxu, 2005. "Limits of Arbitrage and Corporate Financial Policy," CEPR Discussion Papers 4829, C.E.P.R. Discussion Papers.
  16. Chen, Zhiwu & Knez, Peter J, 1995. "Measurement of Market Integration and Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 287-325.
  17. Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
  18. Demange Gabrielle & Laroque Guy, 1995. "Optimality of Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 65(1), pages 218-232, February.
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