Opacity in Financial Markets

Yuki Sato
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Yuki Sato: University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

No 13-63, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper studies the implications of opacity in fi nancial 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 can observe neither opaque funds' portfolios nor opaque assets' payo ffs. Consistent with empirical observations, an "opacity price premium" arises: opaque assets trade at a premium over transparent ones despite identical payoff s. This accompanies endogenous market segmentation: transparent (opaque) funds trade only transparent (opaque) assets. The opacity price premium incentivizes fi nancial engineers to render transparent assets opaque deliberately.

Keywords: Opacity; portfolio delegation; asset prices; moral hazard; signal jamming; career concerns; fund size; market segmentation. (search for similar items in EconPapers)
Pages: 54 pages
Date: 2013-12, Revised 2014-06
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1363

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