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of Jaime Luque

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Endogenous Formation of Security Exchanges

Economic Theory (2017)
Jaime Luque
Marta Faias
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ABSTRACT

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.

KEYWORDS

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

DISCIPLINES

Economic Theory and Finance

PUBLICATION DATE

2017

DOI

10.1007/s00199-016-0989-9

CITATION INFORMATION

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

CREATIVE COMMONS LICENSE

Creative Commons License
Creative Commons License This work is licensed under a Creative Commons CC_BY-NC-ND International License.

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