We study an equilibrium model with restricted investor participation in which strategic arbitrageurs reap prots by exploiting mispricings across dierent market segments. We endogenize the asset structure as the outcome of a security design game played by the arbitrageurs. The equilibrium asset structure depends realistically upon considerations such as depth and gains from trade. It is neither complete nor socially optimal in general; the degree of ineciency depends upon the heterogeneity of investors
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