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Financial Super-Markets: Size Matters for Asset Trade

Author

Listed:
  • Philippe Martin

    (CERAS-ENPC, Paris, & CEPR)

  • H=E9l=E8ne Rey=

    (London=20 School of Economics & CEPR)

Abstract

This paper presents a new theoretical framework to analyze=20 financial markets in an international context. We build a two-country=20 macroeconomic model in which agents are risk averse, assets are imperfect=20 substitutes, the number of financial assets is endogenous, and cross-border= =20 asset trade entails transaction costs. We show that demand effects have=20 important implications for the link between market size, asset prices and=20 financial market development. These effects are consistent with the=20 existing empirical evidence. Due to co-ordination failures, the extent of=20 financial market incompleteness is inefficiently high. We also analyze the= =20 impact of domestic transaction costs and issuing costs on financial markets= =20 and returns.

Suggested Citation

  • Philippe Martin & H=E9l=E8ne Rey=, 2001. "Financial Super-Markets: Size Matters for Asset Trade," International Finance 0012001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0012001
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    More about this item

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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