Financial Innovation and Asset Price Volatility
- (pp. 147-51)
AbstractWe compare asset prices in an overlapping generations model for incomplete and complete markets. Individuals within a generational cohort have heterogeneous beliefs about future states of the economy and thus would like to make bets against each other. In the incomplete-markets economy, agents cannot make such bets. Asset price volatility is very small. The situation changes dramatically when markets are completed through financial innovations as the set of available securities now allows agents with different beliefs to place bets against each other. Wealth shifts across agents and generations. Such changes in the wealth distribution lead to substantial asset price volatility.
Citation2012. "Financial Innovation and Asset Price Volatility." American Economic Review, 102 (3): 147-51. DOI: 10.1257/aer.102.3.147
- E44 Financial Markets and the Macroeconomy
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- E13 General Aggregative Models: Neoclassical
- G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages