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Asset Prices in Segmented and Integrated Markets

Banff International Research Station for Mathematical Innovation and Discovery

This paper evaluates the effect of market integration on prices and welfare, in a model where two Lucas trees grow in separate regions with similar investors. We find equilibrium asset price dynamics and welfare both in segmentation, when each region holds its own asset and consumes its dividend, and in integration, when both regions trade both assets and consume both dividends. Integration always increases welfare. Asset prices may increase or decrease, depending on the time of integration, but decrease on average. Correlation in assets' returns is zero or negative before integration, but significantly positive afterwards, explaining some effects commonly associated with financialization.

Mathematics; Probability theory and stochastic processes; Numerical analysis; Industrial Mathematics / Modelling And Simulation

video/mp4

Author affiliation: Dublin City University

2020-03-24

Attribution-NonCommercial-NoDerivatives 4.0 International

http://hdl.handle.net/2429/73794

Unreviewed

http://creativecommons.org/licenses/by-nc-nd/4.0/