Asset prices in segmented and integrated markets

Paolo Guasoni () and Kwok Chuen Wong ()
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Paolo Guasoni: Dublin City University
Kwok Chuen Wong: Dublin City University

Finance and Stochastics, 2020, vol. 24, issue 4, No 4, 939-980

Abstract: 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.

Keywords: Asset pricing; Integration; Financialisation; Equilibrium; 91G10; 91G80 (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00780-020-00433-4

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