Opacity in financial markets

Research output: Contribution to journalReview article

10 Citations (Scopus)

Abstract

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
Volume27
Issue number12
DOIs
Publication statusPublished - 2014 Dec 1
Externally publishedYes

Fingerprint

Financial markets
Assets
Opacity
Price premium
Asset prices
Investors
Mutual funds
Investor behavior
Premium
Engineers
Hedge funds
Market segmentation
Structured products

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Opacity in financial markets. / Sato, Yuki.

In: Review of Financial Studies, Vol. 27, No. 12, 01.12.2014, p. 3502-3546.

Research output: Contribution to journalReview article

Sato, Yuki. / Opacity in financial markets. In: Review of Financial Studies. 2014 ; Vol. 27, No. 12. pp. 3502-3546.
@article{ca09c74d95274670abc23e109089977b,
title = "Opacity in financial markets",
abstract = "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.",
author = "Yuki Sato",
year = "2014",
month = "12",
day = "1",
doi = "10.1093/rfs/hhu047",
language = "English",
volume = "27",
pages = "3502--3546",
journal = "Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",
number = "12",

}

TY - JOUR

T1 - Opacity in financial markets

AU - Sato, Yuki

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.

UR - http://www.scopus.com/inward/record.url?scp=84924624461&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84924624461&partnerID=8YFLogxK

U2 - 10.1093/rfs/hhu047

DO - 10.1093/rfs/hhu047

M3 - Review article

VL - 27

SP - 3502

EP - 3546

JO - Review of Financial Studies

JF - Review of Financial Studies

SN - 0893-9454

IS - 12

ER -