Markets for Financial Innovation

Ana Babus and Kinda Hachem

No 13457, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a model where both security design and market structure are endogenously determined to explain why standardized securities are frequently traded in decentralized markets. We find that issuers offer debt contracts in thinner markets where investors have a higher price impact, and equity in deeper markets. In turn, investors accept to trade in thinner markets to elicit less variable securities from issuers if gains from trade are small. Otherwise, investors choose to trade in deeper markets where their price impact is minimized. We also show that there exist equilibrium market structures in which both debt and equity are traded.

Keywords: Security design; Market structure; Price impact (search for similar items in EconPapers)
JEL-codes: D47 D86 G23 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Markets for financial innovation (2023)
Working Paper: Markets for Financial Innovation (2019)
Working Paper: Markets for Financial Innovation (2018)
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