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The Cambridge-INET Institute - continuing as the Janeway Institute


Ana Babus (Washington University in St Louis)

"Markets for Financial Innovation"

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 payo§s of the claims being traded form endogenously. Financial intermediaries use the cash áows 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 Önd 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 Öndings 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 a§ect the relationship between security design and market structure.

When: Friday 5th March 2021 - 2:00pm

Where: Zoom

Reading Group: Networks Webinar

Theme: networks