Financial Innovation and Portfolio Risks
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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.
Date issued
2013-05Department
Massachusetts Institute of Technology. Department of EconomicsJournal
American Economic Review
Publisher
American Economic Association
Citation
Simsek, Alp. “Financial Innovation and Portfolio Risks.” American Economic Review 103, no. 3 (May 2013): 398-401. © 2013 the American Economic Association
Version: Final published version
ISSN
0002-8282
1944-7981