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Endogenous Formation of Security Exchanges

Economic Theory (2017)

Jaime Luque
Marta Faias

We use club theory for the first time to provide a model of Securities Exchange (SX) formation. We think of a SX as a local public good that allows its traders to diversify risk by trading their securities with other SX members. In our two-stage equilibrium setting, traders evaluate SXs depending on their risk-sharing possibilities, and, given these evaluations, choose the SX they want to join. Security prices can differ among SXs and traders may value SX memberships differently. We establish continuity properties in both stages and show that equilibrium exists for a generic set of economies.

endogenous securities exchange structure; security prices; risk sharing; membership prices; equilibrium; club theory

Economic Theory and Finance

2017

10.1007/s00199-016-0989-9

Faias, M. and Luque, J. (2017), "Endogenous Formation of Security Exchanges", Economic Theory, August 2017, Volume 64, Issue 2, pp 331–355

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