Strategic Savings and Capital Flows

69 Pages Posted: 28 Nov 2021 Last revised: 14 Mar 2024

See all articles by Daniel Neuhann

Daniel Neuhann

University of Texas at Austin - McCombs School of Business

Michael Sockin

University of Texas at Austin - McCombs School of Business

Date Written: May 12, 2023

Abstract

We propose a dynamic model of oligopolistic financial markets in which market power allows dominant players to tilt asset prices in their favor, and examine it in the context of international risk sharing. Equilibria are shaped by a two-way feedback mechanism: market power distorts risk sharing and savings, while risk exposures and the global distribution of savings determine market power. Dominant players remain under-diversified to capture rents, which reduces trading efficiency and induces a savings glut that depresses risk-free rates. Distortions are most severe when gains from trade are high, as in bad times when risk sharing is most valuable.

Keywords: financial market power, risk sharing, asset pricing

JEL Classification: G11, G12

Suggested Citation

Neuhann, Daniel and Sockin, Michael, Strategic Savings and Capital Flows (May 12, 2023). Available at SSRN: https://ssrn.com/abstract=3971039 or http://dx.doi.org/10.2139/ssrn.3971039

Daniel Neuhann (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Michael Sockin

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

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