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American Economic Review: Vol. 103 No. 3 (May 2013)

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Financial Innovation and Portfolio Risks

Article Citation

Simsek, Alp. 2013. "Financial Innovation and Portfolio Risks." American Economic Review, 103(3): 398-401.

DOI: 10.1257/aer.103.3.398

Abstract

I illustrate the effect of financial innovation on portfolio risks by using an example with risk-sharing needs and belief disagreements. I consider two types of innovation: product innovation, formalized as an expansion of new financial assets; and process innovation, formalized as a reduction in transaction costs. When belief disagreements are large, both types of innovation increase portfolio risks. Moreover, endogenous financial innovation is directed towards speculative assets that increase portfolio risks.

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Simsek, Alp (MIT)

JEL Classifications

G11: Portfolio Choice; Investment Decisions
G12: Asset Pricing; Trading volume; Bond Interest Rates


American Economic Review


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