Markets for Financial Innovation

54 Pages Posted: 23 Jan 2019

See all articles by Ana Babus

Ana Babus

Washington University in St. Louis - Department of Economics

Kinda Cheryl Hachem

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 2019

Abstract

We propose a model where both security design and market structure are endogenously determined to explain why standardized securities are frequently traded in decentralized markets. We find that issuers offer debt contracts in thinner markets where investors have a higher price impact, and equity in deeper markets. In turn, investors accept to trade in thinner markets to elicit less variable securities from issuers if gains from trade are small. Otherwise, investors choose to trade in deeper markets where their price impact is minimized. We also show that there exist equilibrium market structures in which both debt and equity are traded.

Keywords: market structure, price impact, security design

JEL Classification: D47, D86, G23

Suggested Citation

Babus, Ana and Hachem, Kinda Cheryl, Markets for Financial Innovation (January 2019). CEPR Discussion Paper No. DP13457, Available at SSRN: https://ssrn.com/abstract=3319775

Ana Babus (Contact Author)

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

Kinda Cheryl Hachem

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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