International Good Market Segmentation and Financial Innovation

31 Pages Posted: 14 Jan 2003

See all articles by Benjamin Croitoru

Benjamin Croitoru

McGill University - Desautels Faculty of Management

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2005

Abstract

While financial markets have recently become more complete and international capital flows well liberalized, markets for goods remain segmented. To investigate how financial innovation and more complete security markets may relieve the effects of this segmentation, we examine a series of two-country economies with internationally segmented good markets, distinguished by the available financial securities. We show that risk-sharing may be limited even with complete financial markets, and that additional securities may be needed to reach an efficient equilibrium allocation; the location of these securities also profoundly affects the equilibrium. Key to this result is our assumption that there may be heterogeneity and imperfect risk-sharing within countries as well as across countries, a novelty of this work. Sufficient conditions for efficiency include complete international financial markets together with liberalized international financial flows. Under these conditions, heterogeneous agents from the same country may use securities as a substitute for the international shipment of goods. This allows them to partially circumvent the segmentation, allowing for efficient risk sharing.

Keywords: Market Segmentation, Financial Innovation, International Capital Flows, Dynamic Equilibrium

JEL Classification: F30, F36, G12, G15

Suggested Citation

Croitoru, Benjamin and Basak, Suleyman, International Good Market Segmentation and Financial Innovation (August 2005). Available at SSRN: https://ssrn.com/abstract=343420 or http://dx.doi.org/10.2139/ssrn.343420

Benjamin Croitoru

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-3237 (Phone)
514-398-3876 (Fax)

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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