framework while still obtaining Pareto optimality. In the framework developed, the aggregate risk components of individual risks … are exchanged through a highly reduced set of nonspecific securities, while the idiosyncratic risk components are insured …

In this paper we study the effects of financial integration on risk-sharing. Conventional macroeconomic theory suggests … that the integration of financial markets improves welfare. In contrast to the literature we assume that households have … heterogeneous beliefs. Because of the differences in beliefs, households are not only sharing the risk but also speculating. We show …

, OTC markets feature a counterparty risk externality that we show can lead to ex-ante productive inefficiency. This …We model the opacity of over-the-counter (OTC) markets in a setup where agents share risks, but have incentives to … take on short OTC positions that lead to levels of default risk that are higher than Pareto-efficient ones. In particular …

. Such overvaluation may arise from risk sharing activities simply due to market incompleteness, and does not require any …

continuously on states of nature. It is shown that: 1. if financial markets are complete, then asset prices vary continuously with … states of nature, and; 2. if financial markets are incomplete, jumps in asset prices may be unavoidable. Consequently … incomplete financial markets may increase volatility in asset prices significantly …

this contagion with examples of high-frequency trading in equity markets, shocks to one tranche of a collateralized debt …