Effects of Asset Market Structure on Welfare and Trading Volume
We quantitatively explore how asset market structure affects risk-sharing, welfare, and trading volume in stylized rational expectations models. We examine five market structures: perfect asset trading, only bonds and equity, only equity, only bonds, and autarchy. We find a variety of results. First, welfare gains from asset trading are very small in most of our examples. Second, the value of adding new assets falls rapidly as we add assets beyond a single asset. Third, if there is already equity trading, then bonds add little welfare in most of our examples. Fourth, even in our simple model, the addition of a new asset may harm many traders. Fourth, adding a new asset may increase trading volume in old assets.
Kenneth L. Judd, Felix Kubler, Karl Schmedders
Judd, L. Kenneth, Felix Kubler, and Karl Schmedders. 2004. Effects of Asset Market Structure on Welfare and Trading Volume.: 675-694.