Financial Super-Markets: Size Matters for Asset Trade

39 Pages Posted: 17 Sep 2001 Last revised: 24 Oct 2010

See all articles by Philippe Martin

Philippe Martin

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); Centre for Economic Policy Research (CEPR)

Hélène Rey

London Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2001

Abstract

We introduce a new theoretical framework to analyze imperfectly competitive financial markets and trade in assets in an international context. We present a two-country macroeconomic model in which agents are risk averse, assets are imperfect substitutes, the number of financial assets is endogenous, and cross-border asset trade entails transaction costs. We show that demand effects have important implications for the link between market size, asset prices and financial market development. These effects are consistent with existing empirical evidence. Due to co-ordination failures, the extent of financial market incompleteness is inefficiently high. We also analyze the impact of domestic transaction costs and issuing costs on financial markets and returns.

Suggested Citation

Martin, Philippe and Rey, Helene, Financial Super-Markets: Size Matters for Asset Trade (September 2001). NBER Working Paper No. w8476. Available at SSRN: https://ssrn.com/abstract=283348

Philippe Martin (Contact Author)

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4313 6385 (Phone)
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Helene Rey

London Business School ( email )

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Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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