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Optimal Financial-Market Integration and Security Design

Author

Listed:
  • Viral V. Acharya

    (London Business School and Center for Economic Policy Research (CEPR))

  • Alberto Bisin

    (New York University)

Abstract

We study 2-period pure-exchange Capital Asset Pricing Model (CAPM) economies with incomplete financial markets and restricted participation. We characterize the optimal financial-market structure and efficient innovations consisting of both the introduction of new assets and the integration of segmented markets. Welfare gains from innovations are maximal when the endowments of affected agents are negatively correlated. Uncoordinated innovations lead to efficient market structures if all assets have identical participation structure or the markets being integrated trade identical assets. However, coordination failure in the introduction of new assets may result when assets have participation structures that overlap only partially.

Suggested Citation

  • Viral V. Acharya & Alberto Bisin, 2005. "Optimal Financial-Market Integration and Security Design," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2397-2434, November.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2397-2434
    DOI: 10.1086/497041
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    2. Michail Anthropelos & Constantinos Kardaras, 2014. "Equilibrium in risk-sharing games," Papers 1412.4208, arXiv.org, revised Jul 2016.
    3. Avdjiev, Stefan & Zeng, Zheng, 2009. "Impact of heterogeneous managerial productivity on executive hedge markets in an asymmetric information environment," Finance Research Letters, Elsevier, vol. 6(4), pages 187-201, December.
    4. Giuseppe Galloppo & Victoria Paimanova, 2018. "Efficiency and transparency effects on Eastern European financial markets," International Economics and Economic Policy, Springer, vol. 15(1), pages 185-213, January.
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    6. Michail Anthropelos & Constantinos Kardaras, 2017. "Equilibrium in risk-sharing games," Finance and Stochastics, Springer, vol. 21(3), pages 815-865, July.
    7. Hara, Chiaki, 2011. "Pareto improvement and agenda control of sequential financial innovations," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 336-345.

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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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