Risk-Sharing, Investment, and Asset Prices According to Cournot and Arrow-Debreu

We study the macroeconomic consequences of financial market concentration in a complete markets economy with production. We propose a theory in which differences in preferences, productivity, and risk exposure generate gains from trade, but these gains are not fully realized because some large agents internalize their impact on asset prices. In equilibrium, risk-sharing is incomplete and rents from strategic trading feed back into the real economy by distorting the marginal value of production. Along with an increase in valuations, the model can generate a joint decline in investment, productivity, risk-free rates and the market risk premium. Welfare losses from strategic trading can be measured using asset market data, and are largest in the deepest markets