EconStor >
Northwestern University >
Kellogg School of Management - Center for Mathematical Studies in Economics and Management Science, Northwestern University  >
Discussion Papers, Kellogg School of Management, Northwestern University >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/31191
  
Title:Controlling price volatility through financial innovation PDF Logo
Authors:Citanna, Alessandro
Schmedders, Karl
Issue Date:2002
Series/Report no.:Discussion paper // Center for Mathematical Studies in Economics and Management Science 1338
Abstract:In a three-period finite competitive exchange economy with incomplete financial markets and retrading, we study the possibility of controlling asset price volatility through financial innovation. We first give sufficient conditions on preferences and endowments implying that whatever is the innovation which completes markets, it also reduces volatility, typically in this class of economies. We also numerically examine some interesting examples. Then we show the generic existence, even outside this class, of financial innovation which decreases equilibrium price volatility. The existence is obtained under conditions of sufficient market incompleteness. The financial innovation may consist of an asset which is only traded at time zero, or retraded, and with payoffs only at the terminal date. The existence is shown to be robust in the asset payoff space.
Subjects:incomplete markets
financial innovation
volatility
JEL:C60
D52
G10
Document Type:Working Paper
Appears in Collections:Discussion Papers, Kellogg School of Management, Northwestern University

Files in This Item:
File Description SizeFormat
348914253.PDF486.25 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/31191

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.