Financial innovation, market participation and asset prices

Arbeitspapier

This paper proposes that the introduction of non-redundant assets can endogenously modify trader participation in financial markets, which can lead to a lower market premium and a higher interest rate. We demonstrate this mechanism in a tractable exchange economy with endogenous participation. Investors receive heterogeneous random incomes determined by a finite number of macroeconomic factors. They 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 reconciles a number of features that have characterized financial markets in the past three decades: substantial financial innovation; a sharp increase in investor participation; improved risk management practices; an increase in interest rates; and a reduction in the risk premium.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SSE/EFI Working Paper Series in Economics and Finance ; No. 464

Classification and Topics

• Classification: Wirtschaft ; Incomplete Markets ; Financial Markets and the Macroeconomy ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Endogenous Participation ; Epstein-Zin Utility ; Financial Innovation ; Incomplete Markets ; Multiple Risk Factors ; Risk Premium ; Spanning ; Capital Asset Pricing Model ; Unvollständiger Vertrag ; Prinzipal-Agent-Theorie ; Finanzinnovation ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Calvet, Laurent ; Gonzalez-Eiras, Martín ; Sodini, Paolo
• Event: Veröffentlichung
• (who): Stockholm School of Economics, The Economic Research Institute (EFI)
• (where): Stockholm
• (when): 2001

Further information

• Handle: http://hdl.handle.net/10419/56364
• Last update: 10.03.2025, 11:44 AM CET