Financial Innovation, Market Participation, and Asset Prices

Laurent Calvet, Martin Gonzales-Eiras () and Paolo Sodini ()
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Martin Gonzales-Eiras: Departamento de Economía, Universidad de San Andrés - UMSA - Universidad Mayor de San Andrés
Paolo Sodini: SSE - Stockholm School of Economics
Authors registered in the RePEc Author Service: Martin Gonzalez-Eiras

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Abstract: This paper investigates the pricing effects of financial innovation in an economy with endogenous participation and heterogeneous income risks. The introduction of non-redundant assets endogenously modifies the participation set, reduces the covariance between dividends and participants' consumption and thus leads to lower risk premia. In multisector economies, financial innovation spreads across markets through the diversified portfolio of new entrants, and has rich effects on the cross-section of expected returns. The price changes can also lead some investors to leave the markets and give rise to non-degenerate forms of participation turnover. The model is consistent with several features of financial markets over the past few decades: substantial innovation, higher participation, significant turnover in investor composition, improved risk management practices, a slight increase in real interest rates, and a reduction in risk premia.

Keywords: Financial Innovation; Market Participation; Asset Prices (search for similar items in EconPapers)
Date: 2004-09
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Citations: View citations in EconPapers (27)

Published in Journal of Financial and Quantitative Analysis, 2004, Vol.39,n°3, pp.431-459. ⟨10.1017/S0022109000003975⟩

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Related works:
Journal Article: Financial Innovation, Market Participation, and Asset Prices (2004)
Working Paper: Financial Innovation, Market Participation, and Asset Prices (2004)
Working Paper: Financial Innovation, Market Participation and Asset Prices (2003)
Working Paper: Financial Innovation, Market Participation and Asset Prices (2001)
Working Paper: Financial Innovation, Market Participation and Asset Prices (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00478480

DOI: 10.1017/S0022109000003975

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