Opacity in financial markets

Research output: Contribution to journalReview articlepeer-review

13 Citations (Scopus)


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.

Original languageEnglish
Pages (from-to)3502-3546
Number of pages45
JournalReview of Financial Studies
Issue number12
Publication statusPublished - 2014 Dec 1
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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