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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| Format: | Article |
| Language: | en_US |
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American Economic Association
2013
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| Online Access: | http://hdl.handle.net/1721.1/82669 https://orcid.org/0000-0003-0840-1848 |
| 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. |
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