Rostek, Marzena;
Yoon, Ji Hee;
(2025)
Financial Product Design in Decentralized Markets.
Journal of Political Economy
, 133
(3)
10.1086/733422.
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Abstract
Decentralized trading motivates financial innovation, making synthetic products like derivatives nonredundant, even when all traders trade all assets. This nonredundancy arises because derivatives affect cross-security inference (information) and, in markets with large traders, equilibrium price impact (liquidity). The efficient securities differ from the underlying assets. While the market index/mutual funds are efficient in decentralized markets with competitive investors, heterogeneous portfolios that balance index tracking with liquidity transformation become efficient in markets with large traders. Efficient securities facilitate the trading of all fundamental risks but generally forgo hedging all contingencies to minimize the price impact costs associated with risk sharing and diversification.
| Type: | Article |
|---|---|
| Title: | Financial Product Design in Decentralized Markets |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1086/733422 |
| Publisher version: | http://dx.doi.org/10.1086/733422 |
| Language: | English |
| Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10198140 |
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