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 language | English |
|---|---|
| Pages (from-to) | 3502-3546 |
| Number of pages | 45 |
| Journal | Review of Financial Studies |
| Volume | 27 |
| Issue number | 12 |
| DOIs | |
| Publication status | Published - 2014 Dec 1 |
| Externally published | Yes |
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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 journal › Review article
}
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 -