Strategic Financial Innovation in Segmented Markets

34 Pages Posted: 27 Sep 2007

See all articles by Rohit Rahi

Rohit Rahi

London School of Economics - Department of Finance; London School of Economics & Political Science (LSE) - Financial Markets Group

Jean-Pierre Zigrand

London School of Economics - Department of Finance, Systemic Risk Centre, and Financial Markets Group

Multiple version iconThere are 3 versions of this paper

Date Written: September 25, 2007

Abstract

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.

Keywords: Security design, arbitrage, intermediation, market segmentation

JEL Classification: G12, D52

Suggested Citation

Rahi, Rohit and Zigrand, Jean-Pierre, Strategic Financial Innovation in Segmented Markets (September 25, 2007). Available at SSRN: https://ssrn.com/abstract=1017081 or http://dx.doi.org/10.2139/ssrn.1017081

Rohit Rahi (Contact Author)

London School of Economics - Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 20 7955 7313 (Phone)

HOME PAGE: http://https://sites.google.com/lse.ac.uk/rohit-rahi

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Jean-Pierre Zigrand

London School of Economics - Department of Finance, Systemic Risk Centre, and Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6201 (Phone)
+44 20 7955 7420 (Fax)

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