Financial Innovation, Market Participation and Asset Prices

43 Pages Posted: 20 Jul 2003 Last revised: 3 Nov 2014

See all articles by Laurent E. Calvet

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

Martín Gonzalez-Eiras

University of San Andres (UMSA) - Department of Economics

Paolo Sodini

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Multiple version iconThere are 4 versions of this paper

Date Written: July 2003

Abstract

This paper investigates the pricing effects of financial innovation in an economy with endogenous participation and heterogeneous income risks. The introduction of non-redundant assets endogenously modifies the participation set, reduces the covariance between dividends and participants' consumption and thus leads to lower risk premia. In multisector economies, financial innovation spreads across markets through the diversified portfolio of new entrants, and has rich effects on the cross-section of expected returns. The price changes can also lead some investors to leave the markets and give rise to non-degenerate forms of participation turnover. The model is consistent with several features of financial markets over the past few decades: substantial innovation; higher participation; significant turnover in investor composition; improved risk management practices; a slight increase in interest rates; and a reduction in risk premia.

Suggested Citation

Calvet, Laurent E. and Gonzalez-Eiras, Martín and Sodini, Paolo, Financial Innovation, Market Participation and Asset Prices (July 2003). NBER Working Paper No. w9840. Available at SSRN: https://ssrn.com/abstract=423313

Laurent E. Calvet (Contact Author)

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Martín Gonzalez-Eiras

University of San Andres (UMSA) - Department of Economics ( email )

Vito Dumas 284
B1644BID Victoria, Buenos Aires
Argentina
54-11-4725-7047 (Phone)
54-11-4725-7010 (Fax)

Paolo Sodini

Stockholm School of Economics - Department of Finance ( email )

Sveavagen 65, Box 6501
SE-113 83 Stockholm
Sweden
46 8 7369165 (Phone)
46 8 312327 (Fax)

HOME PAGE: http://www.hhs.se/secfi/People/Faculty/Finpso/finp

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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