International Good Market Segmentation and Financial Market Structure

34 Pages Posted: 20 Nov 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)

Date Written: September 2003

Abstract

While financial markets have recently become more complete and international capital flows well liberalized, markets for goods remain segmented. To investigate how 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, under heterogeneity within countries, the financial structure matters: even with internationally complete financial markets, risk sharing is limited and the equilibrium allocation may be inefficient, depending on the location of the securities. Sufficient conditions for efficiency include complete international financial markets together with liberalized international financial flows. Under these conditions, heterogeneous agents from the same country engage in 'financial shipping', using 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, risk sharing, international capital flows

JEL Classification: F30, F36, G12, G15

Suggested Citation

Croitoru, Benjamin and Basak, Suleyman, International Good Market Segmentation and Financial Market Structure (September 2003). CEPR Discussion Paper No. 4060. Available at SSRN: https://ssrn.com/abstract=467483

Benjamin Croitoru

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
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Suleyman Basak (Contact Author)

London Business School ( email )

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London, London NW1 4SA
United Kingdom
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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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