Markets for Financial Innovation

Ana Babus and Kinda Hachem

No 25477, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a theory of financial innovation in which both market structure and the payoffs of the claims being traded are determined endogenously. Intermediaries use the cash flows of an underlying asset to design securities for investors. Demand for securities arises as investors choose markets then trade using strategies represented by quantity-price schedules. We show that intermediaries create increasingly riskier asset-backed securities when facing deeper markets in which investors trade more competitively. In turn, investors elicit less risky securities when they choose thinner markets, revealing a novel role for market fragmentation in the creation of safer securities.

JEL-codes: D47 D86 G23 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-cfn and nep-ino
Note: AP CF EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Ana Babus & Kinda Hachem, 2023. "Markets for Financial Innovation," Journal of Economic Theory, .

Downloads: (external link)
http://www.nber.org/papers/w25477.pdf (application/pdf)

Related works:
Journal Article: Markets for financial innovation (2023)
Working Paper: Markets for Financial Innovation (2019)
Working Paper: Markets for Financial Innovation (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:25477

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w25477

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().