| The number and the characteristics of investors in a market for a risky asset can affect market variables, such as prices and their volatility. In the case of markets for new securities, market participation affects through prices the incentive of Investment Banks to create new securities.; In Chapter 1, I analyze how an exogenous cost of entry in a risky asset market affects two endogenous variables: the degree of market participation and the price volatility. I show that different entry costs generate different participation equilibria and that multiplicity of equilibria arises for some range of entry costs, but the new market entrants are always more risk-averse than the rest of the participants. Every participation equilibrium is associated with a certain volatility of the price of the asset. Most importantly, I show that increased market participation leads to increased asset price volatility, if the new entrants are sufficiently more risk-averse than the old participants. In this case, surprisingly a higher volatility is associated to higher welfare for the investors.; In Chapter 2, I analyze the profitability of new security issuings from the point of view of market participation. I show that if some noise in the system prevents investors from gathering and aggregating all available information about the new security, the new security issue is more welfare improving, than in the case of full information disclosure. On the one hand, more investors decide to participate in the new securities' market in the presence of noise. On the other hand, noise generates a higher sales' price for the new security in equilibrium and higher revenues for the issuer, making the innovation a more profitable endeavour.; The model in Chapter 3 illustrates why investment banks can profit from developing innovative derivative securities despite the absence of patents. The design of the contract allows its developer to extract private information in the early deals. By exercising an information advantage over their imitators, the innovator can have the largest share of the market where this security is issued, while making profit in equilibrium. |
