We study the effects of financial innovation in a model of endogenous information acquisition. We determine the conditions under which the introduction of a derivative written on an existing stock increases or decreases the incentive to purchase information. We show that financial innovation produces some effects which hold across informational structures and others which differ. The former coincide with the few empirical results that are robust in the literature (effects on prices, risk premia, and volatility), while the latter coincide with the ones that differ experiment by experiment (effects on volume, correlation between volume and volatility, and market informational efficiency). Copyright 2002, Oxford University Press.
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Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.
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