Speculation and Risk Sharing with New Financial Assets
Name
Simsek_Speculation and risk sharing.pdf
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605.15 KB
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Adobe PDF
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Author(s)
Simsek, Alp
Date Issued
May 2013
Journal
Quarterly Journal of Economics
Publisher
Oxford University Press
Citation
Simsek, A. “Speculation and Risk Sharing with New Financial Assets.” The Quarterly Journal of Economics 128, no. 3 (July 5, 2013): 1365-1396.
Version
Author's final manuscript
Abstract
I investigate the effect of financial innovation on portfolio risks when traders have belief disagreements. I decompose traders’ average portfolio risks into two components: the uninsurable variance, defined as portfolio risks that would obtain without belief disagreements, and the speculative variance, defined as portfolio risks that result from speculation. My main result shows that financial innovation always increases the speculative variance through two distinct channels: by generating new bets and by amplifying traders’ existing bets. When disagreements are large, these effects are sufficiently strong that financial innovation increases average portfolio risks, decreases average portfolio comovements, and generates greater speculative trading volume relative to risk-sharing volume. Moreover, a profit-seeking market maker endogenously introduces speculative assets that increase average portfolio risks.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike 3.0
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DOI of Published Version
https://doi.org/10.1093/qje/qjt007
