Working paper

Bundlers Dilemmas in Financial Markets with Sampling Investors

Milo Bianchi, and Philippe Jehiel

Abstract

We study banks incentive to pool assets of heterogeneous quality when investors evaluate pools by extrapolating from limited sampling. Pooling assets of heterogeneous quality induces dispersion in investors valuations without affecting their average. Prices are determined by market clearing assuming that investors cannot borrow nor short-sell. A monopolistic bank has the incentive to create heterogeneous bundles only when investors have enough money. When the number of banks is sufficiently large, oligopolistic banks choose extremely heterogeneous bundles, even when investors have little money and even if this turns out to be collectively detrimental to the banks. If in addition banks can originate low quality assets, even at a cost, this collective inefficiency is exacerbated and pure welfare losses arise. Robustness to the presence of rational investors and to the possibility of short-selling is discussed.

Keywords

complex nancial products; bounded rationality; disagreement; market e¢ ciency; sampling.;

Replaced by

Milo Bianchi, and Philippe Jehiel, Bundlers Dilemmas in Financial Markets with Sampling Investors, Theoretical Economics, 2020, forthcoming.

Reference

Milo Bianchi, and Philippe Jehiel, Bundlers Dilemmas in Financial Markets with Sampling Investors, TSE Working Paper, n. 19-1042, October 2019.

See also

Published in

TSE Working Paper, n. 19-1042, October 2019