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Bundling, Belief Dispersion, and Mispricing in Financial Markets

Milo Bianchi () and Philippe Jehiel ()
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Milo Bianchi: TSE - Toulouse School of Economics - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UT1 - Université Toulouse 1 Capitole

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Abstract: Bundling assets of heterogeneous quality results in dispersed valuations when these are based on investor-specific samples from the pool. A monop olistic bank has the incentive to create heterogeneous bundles only when investors have enough money as in that case prices are driven by more opti- mistic valuations. When the number of banks is sufficiently large, oligopolistic banks choose extremely heterogeneous bundles even when investors have little money and even if this turns out to be collectively detrimental to the banks, which we refer to as a Bundler.s Dilemma.

Keywords: complexnancial products; bounded rationality; disagreement; market efficiency (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-fmk
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