DP4176 Strategic Financial Innovation in Segmented Markets
|Author(s):||Rohit Rahi, Jean-Pierre Zigrand|
|Publication Date:||January 2004|
|Keyword(s):||arbitrage, asset innovation, innovation games, restricted participation|
|JEL(s):||D81, G18, G20|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4176|
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.