Strategic financial innovation in segmented markets
Rahi, R.
& Zigrand, J.
(2007).
Strategic financial innovation in segmented markets.
(Financial Markets Group Discussion Papers 595).
Financial Markets Group, The London School of Economics and Political Science.
& Zigrand, J.
(2007).
Strategic financial innovation in segmented markets.
(Financial Markets Group Discussion Papers 595).
Financial Markets Group, The London School of Economics and Political Science.
We study a model with restricted investor participation in which strategic arbitrageurs reap profits by exploiting mispricings across different market segments. We endogenize the asset structure as the outcome of a security design game played by the arbitrageurs. The equilibrium asset structure depends realistically upon considerations such as depth and gains from trade. It is neither complete nor socially optimal in general; the degree of inefficiency depends upon the heterogeneity of investors.