IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Financial Innovation, Market Participation, and Asset Prices

  • Calvet, Laurent
  • Gonzalez-Eiras, Martín
  • Sodini, Paolo

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 real interest rates, and a reduction in risk premia.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://journals.cambridge.org/abstract_S0022109000003975
File Function: link to article abstract page
Download Restriction: no

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 39 (2004)
Issue (Month): 03 (September)
Pages: 431-459

as
in new window

Handle: RePEc:cup:jfinqa:v:39:y:2004:i:03:p:431-459_00
Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
Web page: http://journals.cambridge.org/jid_JFQ
Email:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Pagano, Marco, 1989. "Endogenous Market Thinness and Stock Price Volatility," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 269-87, April.
  2. George-Marios Angeletos & Laurent E. Calvet, 2001. "Incomplete Markets, Growth, and the Business Cycle," Harvard Institute of Economic Research Working Papers 1910, Harvard - Institute of Economic Research.
  3. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  4. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  5. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, 04.
  6. John Heaton & Deborah Lucas, 2000. "Stock prices and fundamentals," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  7. Allen, F. & Gale, D., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 2-92, Wharton School - Weiss Center for International Financial Research.
  8. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
  9. Athanasoulis, Stefano G & Shiller, Robert J, 2000. "The Significance of the Market Portfolio," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 301-29.
  10. John Y. Campbell & Joao F. Cocco & Francisco J. Gomes & Pascala J. Maenhout, 2000. "Investing Retirement Wealth? A Life-Cycle Model," Harvard Institute of Economic Research Working Papers 1896, Harvard - Institute of Economic Research.
  11. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
  12. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
  13. Robert J. Barro & Xavier Sala-i-Martin, 1990. "World Real Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 15-74 National Bureau of Economic Research, Inc.
  14. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
  15. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
  16. Detemple, J.B. & Jorion, P., 1989. "Option Listing And Stock Returns," Papers fb-_89-13, Columbia - Graduate School of Business.
  17. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
  18. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, June.
  19. Orosel, Gerhard O, 1998. "Participation Costs, Trend Chasing, and Volatility of Stock Prices," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 521-57.
  20. Mervyn A. King & Jonathan I. Leape, 1984. "Wealth and Portfolio Composition: Theory and Evidence," NBER Working Papers 1468, National Bureau of Economic Research, Inc.
  21. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-98, June.
  22. David K. Levine & William Zame, 2001. "Does Market Incompleteness Matter," Levine's Working Paper Archive 78, David K. Levine.
  23. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
  24. Laurent E. Calvet, 1999. "Incomplete Markets and Volatility," Harvard Institute of Economic Research Working Papers 1865, Harvard - Institute of Economic Research.
  25. Ross, Stephen A, 1976. "Options and Efficiency," The Quarterly Journal of Economics, MIT Press, vol. 90(1), pages 75-89, February.
  26. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
  27. Andrew B. Abel, 2000. "The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks," NBER Working Papers 7739, National Bureau of Economic Research, Inc.
  28. Stein, Jeremy C, 1987. "Informational Externalities and Welfare-Reducing Speculation," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1123-45, December.
  29. Hens,Thorsten, 1991. "Structure of general equilibrium models with incomplete markets and a single consumption good," Discussion Paper Serie A 353, University of Bonn, Germany.
  30. John H Cochrane, 2003. "Where is the Market Going: Uncertain Facts and Novel Theories," Levine's Working Paper Archive 618897000000000762, David K. Levine.
  31. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
  32. Christian Jochum & Laura E. Kodres, 1998. "Does the Introduction of Futureson Emerging Market Currencies Destabilize the Underlying Currencies?," IMF Working Papers 98/13, International Monetary Fund.
  33. Poterba, J.M. & Samwick, A.A., 1996. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Working papers 96-2, Massachusetts Institute of Technology (MIT), Department of Economics.
  34. David Hirshleifer, 1988. "Residual Risk, Trading Costs, and Commodity Futures Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 173-193.
  35. Franklin Allen & Douglas Gale, 1990. "Incomplete Markets and Incentives to Set Up an Options Exchange*," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 15(1), pages 17-46, March.
  36. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  37. Gyutaeg Oh, 1996. "Some Results in the CAPM with Nontraded Endowments," Management Science, INFORMS, vol. 42(2), pages 286-293, February.
  38. Philippe Weil, 1992. "Equilibrium Asset Prices With Undiversifiable Labor Income Risk," NBER Working Papers 3975, National Bureau of Economic Research, Inc.
  39. Franklin Allen & Douglas Gale, . "Incomplete Markets and Incentives to Set Up An Options Exchange," Rodney L. White Center for Financial Research Working Papers 11-89, Wharton School Rodney L. White Center for Financial Research.
  40. Olivier J. Blanchard, 1993. "Movements in the Equity Premium," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 75-138.
  41. Gerard Debreu, 1956. "Market Equilibrium," Cowles Foundation Discussion Papers 10, Cowles Foundation for Research in Economics, Yale University.
  42. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
  43. Grossman, Sanford J, 1988. "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies," The Journal of Business, University of Chicago Press, vol. 61(3), pages 275-98, July.
  44. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
  45. Telmer, Chris I, 1993. " Asset-Pricing Puzzles and Incomplete Markets," Journal of Finance, American Finance Association, vol. 48(5), pages 1803-32, December.
  46. Christian Jochum & Laura Kodres, 1998. "Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies?," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 486-521, September.
  47. David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer, vol. 11(3), pages 467-494.
  48. Honohan, Patrick, 2000. "How interest rates changed under financial liberalization - a cross-country review," Policy Research Working Paper Series 2313, The World Bank.
  49. Kihlstrom, Richard E & Romer, David & Williams, Steve, 1981. "Risk Aversion with Random Initial Wealth," Econometrica, Econometric Society, vol. 49(4), pages 911-20, June.
  50. Detemple, Jerome B & Selden, Larry, 1991. "A General Equilibrium Analysis of Option and Stock Market Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 279-303, May.
  51. Kjetil Storesletten & Chris Telmer & Amir Yaron, . "Persistent Idiosyncratic Shocks and Incomplete Markets," GSIA Working Papers 24, Carnegie Mellon University, Tepper School of Business.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:39:y:2004:i:03:p:431-459_00. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.