Strategic Financial Innovation in Segmented Markets
34 Pages Posted: 11 Oct 2007
There are 3 versions of this paper
Strategic Financial Innovation in Segmented Markets
Strategic Financial Innovation in Segmented Markets
Strategic Financial Innovation in Segmented Markets
Abstract
We study an equilibrium model with restricted investor participation in which strategic arbitrageurs reap profits by exploiting mispricings across different market segments. We endogenize the asset structure as the outcome of a security design game played by the arbitrageurs. The equilibrium asset structure depends realistically upon considerations such as depth and gains from trade. It is neither complete nor socially optimal in general; the degree of inefficiency depends upon the heterogeneity of investors.
Keywords: Security design, arbitrage, intermediation, market segmentation
JEL Classification: G12, D52
Suggested Citation: Suggested Citation
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