Markets for Financial Innovation / Ana Babus, Kinda Cheryl Hachem.

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Babus, Ana

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w25477.Publication details: Cambridge, Mass. National Bureau of Economic Research 2019.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Financial securities trade in a wide variety of market structures. This paper develops a theory in which both the market structure of trade and the payoffs of the claims being traded form endogenously. Financial intermediaries use the cash flows of an underlying asset to design securities for investors. The demand for securities arises as investors choose markets then trade using strategies represented by quantity-price schedules. We find that intermediaries create increasingly riskier securities when facing deeper markets in which investors trade more competitively. In turn, investors elicit safer securities when they choose to trade in thinner, more fragmented markets. These findings reveal a novel role for market fragmentation in the creation of safer securities. The model is also informative about which investor classes trade which securities and how the distributional properties of the underlying asset affect the relationship between security design and market structure.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w25477 (Browse shelf(Opens below))	Not For Loan

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January 2019.

Financial securities trade in a wide variety of market structures. This paper develops a theory in which both the market structure of trade and the payoffs of the claims being traded form endogenously. Financial intermediaries use the cash flows of an underlying asset to design securities for investors. The demand for securities arises as investors choose markets then trade using strategies represented by quantity-price schedules. We find that intermediaries create increasingly riskier securities when facing deeper markets in which investors trade more competitively. In turn, investors elicit safer securities when they choose to trade in thinner, more fragmented markets. These findings reveal a novel role for market fragmentation in the creation of safer securities. The model is also informative about which investor classes trade which securities and how the distributional properties of the underlying asset affect the relationship between security design and market structure.