Financial Innovation and Portfolio Risks

I illustrate the effect of financial innovation on portfolio risks by using an example with risk-sharing needs and belief disagreements. I consider two types of innovation: product innovation, formalized as an expansion of new financial assets; and process innovation, formalized as a reduction in tr...

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Bibliographic Details
Published in:The American economic review 2013-05, Vol.103 (3), p.398-401
Main Author: Simsek, Alp
Format: Article
Language:English
Subjects:
Betting
Costs
Equilibrium
Equity
Expected utility
Financial assets
Financial innovation
Financial markets
Financial portfolios
Innovations
Investment risk
Net worth
Portfolio analysis
Portfolio investments
Portfolio management
Product innovation
Random variables
Risk aversion
Risk sharing
SPECULATION, INSURANCE, AND FINANCIAL REGULATION
Spreading risk
Studies
Technological change
Technological innovation
Transaction costs
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Summary:I illustrate the effect of financial innovation on portfolio risks by using an example with risk-sharing needs and belief disagreements. I consider two types of innovation: product innovation, formalized as an expansion of new financial assets; and process innovation, formalized as a reduction in transaction costs. When belief disagreements are large, both types of innovation increase portfolio risks. Moreover, endogenous financial innovation is directed towards speculative assets that increase portfolio risks. [PUBLICATION ABSTRACT]
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.103.3.398