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Markets for Financial Innovation

Author

Listed:
  • Ana Babus

    (Washington University in St. Louis)

  • Kinda Hachem

    (University of Chicago)

Abstract

Regulators have pushed for centralized trading as a way to increase transparency following the recent financial crisis. However, the nature of the security being traded may change when the market structure in which it trades is forced to change. In this paper, we develop a model to explore interactions between market formation and the design of new financial securities. Our results rationalize why debt contracts are frequently traded in over-the-counter markets whereas equity is typically traded on exchanges. We also find that regulations promoting universally larger markets can reduce investor welfare by reducing the production of securities with less variable payoffs.

Suggested Citation

  • Ana Babus & Kinda Hachem, 2018. "Markets for Financial Innovation," 2018 Meeting Papers 355, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:355
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    References listed on IDEAS

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    Cited by:

    1. Jérôme Dugast & Semih Üslü & Pierre-Olivier Weill, 2022. "A Theory of Participation in OTC and Centralized Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(6), pages 3223-3266.
    2. Thomas M. Eisenbach & Gregory Phelan, 2022. "Cournot Fire Sales," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 508-542, July.
    3. Jiaji An & He Di, 2024. "How Can Financial Innovation Curb Carbon Emissions in China? Exploring the Mediating Role of Industrial Structure Upgrading from a Spatial Perspective," Sustainability, MDPI, vol. 16(11), pages 1-20, May.

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    More about this item

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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