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Opacity in Financial Markets

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  • Yuki Sato

Abstract

This paper studies the implications of opacity in financial markets for investor behavior, asset prices, and welfare. Transparent funds (e.g., mutual funds) and opaque funds (e.g., hedge funds) trade transparent assets (e.g., plain-vanilla products) and opaque assets (e.g., structured products). Investors observe neither opaque funds' portfolios nor opaque assets' payoffs. Consistent with empirical observations, an "opacity price premium" arises: opaque assets trade at a premium over transparent ones despite identical payoffs. This accompanies endogenous market segmentation: transparent (opaque) funds trade only transparent (opaque) assets. The opacity price premium incentivizes financial engineers to render transparent assets opaque deliberately.

Suggested Citation

  • Yuki Sato, 2014. "Opacity in Financial Markets," The Review of Financial Studies, Society for Financial Studies, vol. 27(12), pages 3502-3546.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:12:p:3502-3546.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu047
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    Citations

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    Cited by:

    1. Célérier, Claire & Vallée, Boris, 2016. "Catering to investors through product complexity," ESRB Working Paper Series 14, European Systemic Risk Board.
    2. Yuexin Li & Xiaoyin Ma & Luc Renneboog, 2024. "In Art We Trust," Management Science, INFORMS, vol. 70(1), pages 98-127, January.
    3. Ashton, John K. & Hudson, Robert S., 2017. "The price, quality and distribution of mortgage payment protection insurance: A hedonic pricing approach," The British Accounting Review, Elsevier, vol. 49(2), pages 242-255.
    4. Jungherr, Joachim, 2018. "Bank opacity and financial crises," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 157-176.
    5. Rubtsov, Alexey, 2016. "Model misspecification and pricing of illiquid claims," Finance Research Letters, Elsevier, vol. 18(C), pages 242-249.
    6. Olena Havrylchyk, 2018. "Regulatory framework for the loan-based crowdfunding platforms," OECD Economics Department Working Papers 1513, OECD Publishing.
    7. Flávia Januzzi & Aureliano Bressan & Fernando Moreira, 2020. "Opacity, Risk, Performance and Inflows in Hedge Funds," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 24(1), pages 77-99.
    8. Stenzel, A. & Wagner, W.B., 2013. "Asset Opacity and Liquidity," Discussion Paper 2013-066, Tilburg University, Center for Economic Research.
    9. Bożena Frączek, 2020. "A System to Support the Transparency of Consumer Credit Offers," JRFM, MDPI, vol. 13(12), pages 1-13, December.
    10. Jungherr, Joachim, 2016. "Bank opacity and financial crises," Economics Working Papers ADE2016/02, European University Institute.
    11. Martin Hibbeln & Werner Osterkamp, 2024. "Simple is simply not enough—features versus labels of complex financial securities," Review of Derivatives Research, Springer, vol. 27(2), pages 113-150, July.
    12. Sato, Yuki, 2016. "Delegated portfolio management, optimal fee contracts, and asset prices," Journal of Economic Theory, Elsevier, vol. 165(C), pages 360-389.
    13. Fuess, Roland & Ruf, Daniel, 2015. "Pre-Trade Transparency and Return Co-movements in Commercial Real Estate Markets," Working Papers on Finance 1520, University of St. Gallen, School of Finance, revised Jan 2017.
    14. Galanis, Spyros, 2018. "Financial complexity and trade," Games and Economic Behavior, Elsevier, vol. 112(C), pages 219-230.
    15. André Stenzel & Wolf Wagner, 2022. "Opacity, liquidity and disclosure requirements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(5-6), pages 658-689, May.
    16. Wagner, Wolf & Uras, Burak, 2017. "Efficient Lemons," CEPR Discussion Papers 11803, C.E.P.R. Discussion Papers.

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