Financial Innovation, Values and Volatilities when Markets Are Incomplete&ast

Jerome Detemple

The Geneva Risk and Insurance Review, 1990, vol. 15, issue 1, 47-53

Abstract: The traditional pricing methodology in finance values derivative securities as redundant assets that have no impact on equilibrium prices and allocations. This paper considers a model with incomplete markets in which the valuation of derivative securities cannot be treated independently from the valuation of the primary securities. The model constitutes a framework for the analysis of the consequences of financial innovation (creation of new contracts or modification of existing contracts). We provide a numerical counterexample to the popular belief that financial innovations that increase the volatilities of traded securities are “bad†. In this example the introduction of an option increases the volatility of the rate of return on the underlying stock, yet the creation of this asset is unanimously supported by investors. The Geneva Papers on Risk and Insurance Theory (1990) 15, 47–53. doi:10.1007/BF01498459

Date: 1990
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.palgrave-journals.com/grir/journal/v15/n1/pdf/grir19903a.pdf Link to full text PDF (application/pdf)
http://www.palgrave-journals.com/grir/journal/v15/n1/full/grir19903a.html Link to full text HTML (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:genrir:v:15:y:1990:i:1:p:47-53

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10713

Access Statistics for this article

The Geneva Risk and Insurance Review is currently edited by Michael Hoy and Nicolas Treich

More articles in The Geneva Risk and Insurance Review from Palgrave Macmillan, International Association for the Study of Insurance Economics (The Geneva Association) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().