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Financial Innovation and Price Volatility

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  • Alessandro, CITANNA

Abstract

In a three-period finite competitive exchange economy with incomplete financial markets and retrading, we show the generic existence of financial innovation which decreases equilibrium price volatility (as well as innovation which increases it). The existence is obtained under conditions of sufficient market incompleteness. The financial innnovation may consist of an asset which is only traded at time zero, or retraded, and with payoffs only at the terminal date. The existence is shown to be robust in the asset payoff space.

Suggested Citation

  • Alessandro, CITANNA, 1999. "Financial Innovation and Price Volatility," HEC Research Papers Series 685, HEC Paris.
    • Handle: RePEc:ebg:heccah:0685
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    References listed on IDEAS

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    More about this item

    Keywords

    Incomplete markets; financial innovation; volatility;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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