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Asset prices in segmented and integrated markets

Author

Listed:
  • Paolo Guasoni

    (Dublin City University)

  • Kwok Chuen Wong

    (Dublin City University)

Abstract

This paper evaluates the effect of market integration on prices and welfare, in a model where two Lucas trees grow in separate regions with similar investors. We find equilibrium asset price dynamics and welfare both in segmentation, when each region holds its own asset and consumes its dividend, and in integration, when both regions trade both assets and consume both dividends. Integration always increases welfare. Asset prices may increase or decrease, depending on the time of integration, but decrease on average. Cross-asset correlation is zero or negative before integration, but significantly positive afterwards, explaining some effects commonly associated with financialisation.

Suggested Citation

  • Paolo Guasoni & Kwok Chuen Wong, 2020. "Asset prices in segmented and integrated markets," Finance and Stochastics, Springer, vol. 24(4), pages 939-980, October.
    • Handle: RePEc:spr:finsto:v:24:y:2020:i:4:d:10.1007_s00780-020-00433-4
    DOI: 10.1007/s00780-020-00433-4
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    More about this item

    Keywords

    Asset pricing; Integration; Financialisation; Equilibrium;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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