Financial Innovation, Market Participation and Asset Prices

Laurent Calvet, Martin Gonzalez-Eiras and Paolo Sodini

No 9840, NBER Working Papers from National Bureau of Economic Research, Inc

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 interest rates; and a reduction in risk premia.

JEL-codes: D52 E44 (search for similar items in EconPapers)
Date: 2003-07
New Economics Papers: this item is included in nep-fin and nep-ino
Note: AP EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published as Calvet, Laurent, Martin Gonzalez-Eiras and Paolo Sodini. "Financial Innovation, Market Participation, And Asset Prices," Journal of Financial and Quantitative Analysis, 2004, v39(3,Sep), 431-459.

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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 (2004)
Working Paper: Financial Innovation, Market Participation and Asset Prices (2001)
Working Paper: Financial Innovation, Market Participation and Asset Prices (2001)
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