Kalmus, Philip Alexander
(1999)
Competitive markets with informational asymmetries and trading restrictions: Welfare analysis and applications to finance.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis consists of three original articles in the field of general equilibrium with incomplete markets and general equilibrium with asymmetric information, and an introduction to the theory, which traces its development and embeds the following chapters in a common framework. In Pareto Improving Trade Restrictions in an Incomplete Markets Economy, we consider a stylised three period one good general equilibrium model with incomplete security markets. We show that the introduction of an indiscriminate marginal constraint on security trades can lead to a Pareto improvement, even though all prices are endogenous and agents are fully rational and have symmetric information. In Signaling Credit Quality Independently of Contract Choice: a Non-Transaction Cost Approach to Swaps in Anonymous Markets, we demonstrate that under two conditions, swaps are non-redundant securities in anonymous financial markets. Firstly, there is asymmetric information over the project payoff which is financed by swaps. And secondly, borrowers are restricted from being investors at the same time. If either of this condition fails, then swaps are redundant assets. Swaps permit a constrained optimal solution to an asymmetric information problem. Finally, Anonymous Corporate Bond Markets with Asymmetric Information, the main article of this thesis, shows that in an anonymous credit market which is characterised by limited liability and asymmetric information between borrowers and lenders, the nominal rate of interest on tradable debt (the coupon rate) sorts borrowers by their riskiness and in this way has an indirect influence on the price and quantity of bonds traded in equilibrium. This is in contrast to symmetric information models, in which the nominal coupon rate has no function. The paper claims that the adverse sorting effect of the nominal interest rate, as in Stiglitz-Weiss (1981), is maintained in a competitive setting, but that, even though changes in the nominal interest rate result in non-monotonic changes in the deliveries of agents, the orderly functioning of markets is not impaired.
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