Financial complexity and trade
Financial complexity and trade
What are the implications on trading activity if investors are not sophisticated enough to understand and evaluate trades that have a complex payoff structure? Can frictions generated by this type of financial complexity be so severe that they lead to a complete market freeze, like that of the recent financial crisis? We show that for smooth convex preferences, including subjective expected utility, even extreme complexity cannot halt trade, unlike what happens for non-smooth preferences, such as maxmin expected utility. In the latter case, policies that make complex securities easier to understand or investors more sophisticated have a positive welfare effect, as they allow for existing gains from trade to materialise.
Agreeable Trades, Ambiguity Aversion, Betting, Financial Complexity, Financial Crises, No Trade, Agreeable Bets
University of Southampton
Galanis, Spyros
66c2b7af-6f28-4319-be60-787796b4054c
30 May 2017
Galanis, Spyros
66c2b7af-6f28-4319-be60-787796b4054c
Galanis, Spyros
(2017)
Financial complexity and trade
(Discussion Papers in Economics and Econometrics, 1703)
Southampton.
University of Southampton
25pp.
Record type:
Monograph
(Discussion Paper)
Abstract
What are the implications on trading activity if investors are not sophisticated enough to understand and evaluate trades that have a complex payoff structure? Can frictions generated by this type of financial complexity be so severe that they lead to a complete market freeze, like that of the recent financial crisis? We show that for smooth convex preferences, including subjective expected utility, even extreme complexity cannot halt trade, unlike what happens for non-smooth preferences, such as maxmin expected utility. In the latter case, policies that make complex securities easier to understand or investors more sophisticated have a positive welfare effect, as they allow for existing gains from trade to materialise.
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Financial Complexity and Tradepdf
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Published date: 30 May 2017
Keywords:
Agreeable Trades, Ambiguity Aversion, Betting, Financial Complexity, Financial Crises, No Trade, Agreeable Bets
Organisations:
Economics
Identifiers
Local EPrints ID: 410887
URI: http://eprints.soton.ac.uk/id/eprint/410887
ISSN: 0966-4246
PURE UUID: 6c086844-f268-4c89-9c75-877ada36e22b
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Date deposited: 09 Jun 2017 16:30
Last modified: 15 Mar 2024 14:29
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Author:
Spyros Galanis
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