Financial Innovation and Portfolio Risks

Alp Simsek

American Economic Review, 2013, vol. 103, issue 3, 398-401

Abstract: 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.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/aer.103.3.398
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Citations: View citations in EconPapers (14)

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