×

Asset prices in segmented and integrated markets. (English) Zbl 1452.91317

Summary: 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. Cross-asset correlation is zero or negative before integration, but significantly positive afterwards, explaining some effects commonly associated with financialisation.

MSC:

91G30 Interest rates, asset pricing, etc. (stochastic models)
91G15 Financial markets
PDF BibTeX XML Cite
Full Text: DOI

References:

[1] Abramowitz, M.; Stegun, I. A., Handbook of Mathematical Functions with Formulas, Graphs, and Mathematical Tables (1965), New York: Dover, New York · Zbl 0515.33001
[2] Adler, M.; Dumas, B., International portfolio choice and corporation finance: a synthesis, Journal of Finance, 38, 925-984 (1983)
[3] Banner, A. D.; Fernholz, R.; Karatzas, I., Atlas models of equity markets, Ann. Appl. Probab., 15, 2296-2330 (2005) · Zbl 1099.91056
[4] Basak, S.; Cuoco, D., An equilibrium model with restricted stock market participation, Rev. Financ. Stud., 11, 309-341 (1998)
[5] Basak, S.; Pavlova, A., A model of financialization of commodities, Journal of Finance, 71, 1511-1556 (2016)
[6] Bekaert, G.; Harvey, C. R., Emerging equity market volatility, J. Financ. Econ., 43, 29-77 (1997)
[7] Bhamra, H. S.; Coeurdacier, N.; Guibaud, S., A dynamic equilibrium model of imperfectly integrated financial markets, J. Econ. Theory, 154, 490-542 (2014) · Zbl 1309.91131
[8] Bhardwaj, G., Gorton, G., Rouwenhorst, G.: Facts and fantasies about commodity futures ten years later. Tech. rep., National Bureau of Economic Research (2015). Available online at https://www.nber.org/papers/w21243.pdf
[9] Borodin, A. N.; Salminen, P., Handbook of Brownian Motion - Facts and Formulae (2012), Basel: Birkhäuser, Basel · Zbl 0859.60001
[10] Brown, G., Sarkozy, N.: Oil prices need government supervision. Wall St. J. (December 9, 2009). Available online at https://www.wsj.com/articles/SB124701217125708963
[11] Buraschi, A.; Trojani, F.; Vedolin, A., When uncertainty blows in the orchard: comovement and equilibrium volatility risk premia, Journal of Finance, 69, 101-137 (2014)
[12] Carmona, R.; Aïd, R., Financialization of the commodities markets: a non-technical introduction, Commodities, Energy and Environmental Finance, 3-37 (2015), Berlin: Springer, Berlin
[13] Chabakauri, G., Dynamic equilibrium with two stocks, heterogeneous investors, and portfolio constraints, Rev. Financ. Stud., 26, 3104-3141 (2013)
[14] Chan, P.; Sircar, R.; Stein, M. V., A feedback model for the financialization of commodity markets, SIAM J. Financ. Math., 6, 870-899 (2015) · Zbl 1338.91127
[15] Cochrane, J. H., The dog that did not bark: a defense of return predictability, Rev. Financ. Stud., 21, 1533-1575 (2008)
[16] Cochrane, J. H.; Longstaff, F. A.; Santa-Clara, P., Two trees, Rev. Financ. Stud., 21, 347-385 (2007)
[17] Cont, R.; Wagalath, L., Institutional investors and the dependence structure of asset returns, Int. J. Theor. Appl. Finance, 19 (2016) · Zbl 1337.91140
[18] Cuchiero, C., Polynomial processes in stochastic portfolio theory, Stochastic Processes and Their Applications, 1829-1872 (2019) · Zbl 1426.91243
[19] Dumas, B., Dynamic equilibrium and the real exchange rate in a spatially separated world, Rev. Financ. Stud., 5, 153-180 (1992)
[20] Dumas, B.; Harvey, C. R.; Ruiz, P., Are correlations of stock returns justified by subsequent changes in national outputs?, J. Int. Money Financ., 22, 777-811 (2003)
[21] Farhi, E.; Gabaix, X., Rare disasters and exchange rates, Q. J. Econ., 131, 1-52 (2015) · Zbl 1400.91245
[22] Fernholz, R.; Karatzas, I., Relative arbitrage in volatility-stabilized markets, Ann. Finance, 1, 149-177 (2005) · Zbl 1233.91244
[23] Filipović, D.; Larsson, M., Polynomial diffusions and applications in finance, Finance Stoch., 20, 931-972 (2016) · Zbl 1386.60237
[24] Filipović, D.; Larsson, M., Polynomial jump-diffusion models, Stoch. Syst., 10, 71-97 (2020) · Zbl 1450.60038
[25] Filipović, D.; Larsson, M.; Trolle, A. B., Linear-rational term structure models, Journal of Finance, 72, 655-704 (2017)
[26] Foerster, S. R.; Karolyi, G. A., The effects of market segmentation and investor recognition on asset prices: evidence from foreign stocks listing in the United States, Journal of Finance, 54, 981-1013 (1999)
[27] Goetzmann, W. N.; Li, L.; Rouwenhorst, K. G., Long-term global market correlations, J. Bus., 78, 1-38 (2005)
[28] Gordon, M. J.; Shapiro, E., Capital equipment analysis: the required rate of profit, Manag. Sci., 3, 102-110 (1956)
[29] Hansen, S. L., Cross-sectional asset pricing with heterogeneous preferences and beliefs, J. Econ. Dyn. Control, 58, 125-151 (2015) · Zbl 1401.91075
[30] Hurd, T. R.; Kuznetsov, A., Explicit formulas for Laplace transforms of stochastic integrals, Markov Process. Relat. Fields, 14, 277-290 (2008) · Zbl 1149.60021
[31] Karatzas, I.; Lehoczky, J. P.; Shreve, S. E.; Xu, G. L., Martingale and duality methods for utility maximization in an incomplete market, SIAM J. Control Optim., 29, 702-730 (1991) · Zbl 0733.93085
[32] Lucas, R. E. Jr., Asset prices in an exchange economy, Econometrica, 46, 1429-1445 (1978) · Zbl 0398.90016
[33] Martin, I., The Lucas orchard, Econometrica, 81, 55-111 (2013) · Zbl 1274.91202
[34] Masters, M.W.: Testimony before the committee on homeland security and governmental affairs. US Senate, Washington, May 20 (2008). Available online at https://www.hsgac.senate.gov/imo/media/doc/052008Masters.pdf
[35] Menzly, L.; Santos, T.; Veronesi, P., Understanding predictability, J. Polit. Econ., 112, 1-47 (2004)
[36] Merton, R. C., A simple model of capital market equilibrium with incomplete information, Journal of Finance, 42, 483-510 (1987)
[37] Pal, S., Analysis of market weights under volatility-stabilized market models, Ann. Appl. Probab., 21, 1180-1213 (2011) · Zbl 1225.60136
[38] Pavlova, A.; Rigobon, R., Asset prices and exchange rates, Rev. Financ. Stud., 20, 1139-1180 (2007)
[39] Santos, T.; Veronesi, P., Labor income and predictable stock returns, Rev. Financ. Stud., 19, 1-44 (2006)
[40] Santos, T.; Veronesi, P., Habit formation, the cross section of stock returns and the cash-flow risk puzzle, J. Financ. Econ., 98, 385-413 (2010)
[41] Solnik, B. H., An equilibrium model of the international capital market, J. Econ. Theory, 8, 500-524 (1974)
[42] Solnik, B. H., The international pricing of risk: an empirical investigation of the world capital market structure, Journal of Finance, 29, 365-378 (1974)
[43] Solnik, B. H.; Boucrelle, C.; Le Fur, Y., International market correlation and volatility, Financ. Anal. J., 52, 5, 17-34 (1996)
[44] Stulz, R. M., A model of international asset pricing, J. Financ. Econ., 9, 383-406 (1981)
[45] Stulz, R. M., On the effects of barriers to international investment, Journal of Finance, 36, 923-934 (1981)
[46] Tang, K.; Xiong, W., Index investment and the financialization of commodities, Financ. Anal. J., 68, 5, 54-74 (2012)
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.