Discussion Paper Details

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Title: International Good Market Segmentation and Financial Market Structure

Author(s): Suleyman Basak and Benjamin Croitoru

Publication Date: September 2003

Keyword(s): financial innovation, international capital flows, market segmentation and risk sharing

Programme Area(s): Financial Economics

Abstract: While financial markets have recently become more complete and international capital flows well liberalized, markets for goods remain segmented. To investigate how more complete security markets may relieve the effects of this segmentation, we examine a series of two-country economies with internationally segmented good markets, distinguished by the available financial securities. We show that, under heterogeneity within countries, the financial structure matters: even with internationally complete financial markets, risk sharing is limited and the equilibrium allocation may be inefficient, depending on the location of the securities. Sufficient conditions for efficiency include complete international financial markets together with liberalized international financial flows. Under these conditions, heterogeneous agents from the same country engage in ?financial shipping?, using securities as a substitute for the international shipment of goods. This allows them to partially circumvent the segmentation, allowing for efficient risk sharing.

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Bibliographic Reference

Basak, S and Croitoru, B. 2003. 'International Good Market Segmentation and Financial Market Structure'. London, Centre for Economic Policy Research.