Working Paper: CEPR ID: DP1894
Authors: Thomas Gehrig
Abstract: This paper surveys the literature on the geography of financial activity in order to assess the role of financial centres. While there is widespread concern that rapid technological progess especially in communication and information technologies will ultimately lead to a delocalization of financial activity, the role of financial centres depends delicately on their success in generating local externalities. On the basis of empirical evidence on recent developments in world financial markets, it is argued that the ability of financial centres to attract financial activity in information sensitive securities will be crucial for their future role. To the extent that information is localized and market access is costly, financial centres perform an important role in aggregating local information. Therefore a reduction of global market access and information costs may increase global demand for local securities, and even strengthen the role of certain financial centres. Furthermore, complementarities between informationally sensitive and less sensitive financial activities may also attract footloose activities to financial centres.
Keywords: financial centres; information sensitivity; local information; market access costs; thick market externalities
JEL Codes: G15; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial centers (G29) | Aggregating local information (D89) |
| Aggregating local information (D89) | Trading of information-sensitive securities (G14) |
| Reduction in global market access and information costs (F69) | Increased global demand for local securities (G15) |
| Complementarities between informationally sensitive and less sensitive financial activities (G29) | Increased concentration in financial centers (G19) |
| Technological improvements in communication (L96) | Decline in lower-order financial centers (N21) |