TY - JOUR
T1 - Opacity in financial markets
AU - Sato, Yuki
N1 - Publisher Copyright:
© 2014 The Author.
PY - 2014/12/1
Y1 - 2014/12/1
N2 - This paper studies the implications of opacity in financial markets for investor behavior, asset prices, and welfare. Transparent funds (e.g., mutual funds) and opaque funds (e.g., hedge funds) trade transparent assets (e.g., plain-vanilla products) and opaque assets (e.g., structured products). Investors observe neither opaque funds' portfolios nor opaque assets' payoffs. Consistent with empirical observations, an "opacity price premium" arises: opaque assets trade at a premium over transparent ones despite identical payoffs. This accompanies endogenous market segmentation: transparent (opaque) funds trade only transparent (opaque) assets. The opacity price premium incentivizes financial engineers to render transparent assets opaque deliberately.
AB - This paper studies the implications of opacity in financial markets for investor behavior, asset prices, and welfare. Transparent funds (e.g., mutual funds) and opaque funds (e.g., hedge funds) trade transparent assets (e.g., plain-vanilla products) and opaque assets (e.g., structured products). Investors observe neither opaque funds' portfolios nor opaque assets' payoffs. Consistent with empirical observations, an "opacity price premium" arises: opaque assets trade at a premium over transparent ones despite identical payoffs. This accompanies endogenous market segmentation: transparent (opaque) funds trade only transparent (opaque) assets. The opacity price premium incentivizes financial engineers to render transparent assets opaque deliberately.
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U2 - 10.1093/rfs/hhu047
DO - 10.1093/rfs/hhu047
M3 - Review article
AN - SCOPUS:84924624461
SN - 0893-9454
VL - 27
SP - 3502
EP - 3546
JO - Review of Financial Studies
JF - Review of Financial Studies
IS - 12
ER -