Financial complexity and trade

• 成果类型: Article
• 署名作者: Galanis, Spyros
• 署名单位: University of Southampton
• 刊物名称: GAMES AND ECONOMIC BEHAVIOR
• ISSN/ISSBN: 0899-8256
• DOI: 10.1016/j.geb.2018.08.007
• 发表日期: 2018
• 页码: 219-230
• 关键词: Financial complexity; financial crises; Agreeable bets; Agreeable trades; No trade; Betting; ambiguity aversion

摘要

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? Starting from an allocation that is not Pareto optimal, we find that whether complexity impedes trade depends on how investors perceive risk and uncertainty. For smooth convex preferences, such as subjective expected utility, complexity cannot halt trade, even in the extreme case where each investor is so unsophisticated that he can only trade up to one Arrow-Debreu security, without being able to combine two or more in order to construct a complex trade. However, for non smooth preferences, which allow for kinked indifference curves, such as maxmin expected utility, complexity can completely shut down trade. (C) 2018 Elsevier Inc. All rights reserved.