Strategic Financial Innovation in Segmented Markets

Rohit Rahi () and Jean-Pierre Zigrand ()

No 4176, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyse an equilibrium model with restricted investor participation in which strategic arbitrageurs play an innovation game and exploit the resulting mispricings by reaping trading profits. Since the equilibrium asset structure is not chosen by a social planner, it is chosen to maximize arbitrage profits and depends therefore realistically upon considerations such as depth, liquidity and gains from trade. In addition, the welfare properties of the resulting asset structure are studied. It is shown that the degree of inefficiency depends upon the heterogeneity of investors. The conjecture of the optimality of ?Macro Markets? is analysed formally in this framework.

Keywords: Asset innovation; Arbitrage; Restricted participation; Innovation games (search for similar items in EconPapers)
JEL-codes: D81 G18 G20 (search for similar items in EconPapers)
Date: 2004-01
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-mic
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Related works:
Journal Article: Strategic Financial Innovation in Segmented Markets (2009)
Working Paper: Strategic financial innovation in segmented markets (2007)
Working Paper: Strategic Financial Innovation in Segmented Markets (2007)
Working Paper: Strategic financial innovation in segmented markets (2004)
Working Paper: Strategic Financial Innovation in Segmented Markets (2004)
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