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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27332
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| Title: | Financial Innovation, Market Participation and Asset Prices |
| Authors: | Calvet, Laurent
Gonzalez-Eiras, Martín
Sodini, Paolo |
| Keywords: | Endogenous participation
Epstein-Zin utility
financial innovation
incomplete markets
multiple risk factors
spanning |
| Issue Date: | Mar-2002 |
| Series/Report no.: | S-MF-02-03 |
| Abstract: | This paper theoretically investigates the pricing effects of financial
innovation in an economy with endogenous participation and heterogeneous
income risks. The introduction of non-redundant assets can endogenously
modify the participation set, reduce the covariance between dividends
and participants’ consumption and thus lead to lower risk premia.
This mechanism is demonstrated in a tractable exchange economy with a
finite number of macroeconomic factors. Agents can freely borrow and
lend, but must pay a fixed entry cost to invest in risky assets.
Security prices and the participation structure are jointly determined
in equilibrium. The model is consistent with several features of
financial markets over the past few decades: substantial financial
innovation; a sharp increase in investor participation; improved risk
management practices; a slight increase in interest rates; and a
reduction in risk premia. |
| URI: | http://hdl.handle.net/2451/27332 |
| Appears in Collections: | Macro Finance
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