Financial innovation and financial fragility

Arbeitspapier

We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive. Financial innovation can make both investors and intermediaries worse off. The model mimics several facts from recent historical experiences, and points to new avenues for financial reform.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Nota di Lavoro ; No. 2010,114

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Portfolio Choice; Investment Decisions ; International Financial Markets
• Thema: Financial Innovation ; Financial Fragility ; Securities ; Risks

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Gennaioli, Nicola ; Shleifer, Andrei ; Vishny, Robert
• Ereignis: Veröffentlichung
• (wer): Fondazione Eni Enrico Mattei (FEEM)
• (wo): Milano
• (wann): 2010

Weitere Informationen

• Handle: http://hdl.handle.net/10419/43480
• Letzte Aktualisierung: 10.03.2025, 11:41 MEZ