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SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics >
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http://hdl.handle.net/10419/56364
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| Title: | | Financial innovation, market participation and asset prices  |
| Authors: | | Calvet, Laurent Gonzalez-Eiras, Martín Sodini, Paolo |
| Issue Date: | | 2001 |
| Series/Report no.: | | SSE/EFI Working Paper Series in Economics and Finance 464 |
| Abstract: | | 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. |
| Subjects: | | Endogenous Participation Epstein-Zin Utility Financial Innovation Incomplete Markets Multiple Risk Factors Risk Premium Spanning |
| JEL: | | D52 E44 G12 |
| Document Type: | | Working Paper |
| Appears in Collections: | | SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics
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