Variety and Agglomeration in Financial Markets

Ana Babus

No 21833, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Financial markets are highly differentiated: firms issue many products beyond stocks and bonds. This variety is consequential because the products firms use determine which issuers raise capital, on what terms, and which risks investors absorb. We propose a model of variety and firms’ allocation across products. Products repackage firms’ cash flows and differ in expected payoff per unit of exposure to aggregate risk and firm-specific risk passed to investors. Aggregate exposure raises the compensation all issuers must offer, whereas firm-specific risk lowers only the issuing firm’s payoff. We show that specialized products coexist with widely adopted ones through trade-offs between these two dimensions.

JEL-codes: G12 G23 L13 (search for similar items in EconPapers)
Date: 2026-08
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