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| Financial Innovation, Market Participation and Asset Prices | |
 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.
Authors:
Laurent CALVET
& Martin Gonzalez-Eiras & Paolo Sodini (2001)
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Financial Innovation, Market Participation and Asset Prices
http://ideas.repec.org/p/fth/harver/1928.html
Financial Innovation, Market Participation and Asset Prices
http://ideas.repec.org/p/hhs/hastef/0464.html
Financial Innovation, Market Participation and Asset Prices
http://ideas.repec.org/p/nbr/nberwo/9840.html
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