American Economic Review Vol. 102 No. 3 2012

Financial Innovation and Asset Price Volatility

Felix Kübler¹; Karl Schmedders²

¹ Dept. of Banking and Finance, University of Zurich, Plattenstrasse 32, 8032 Zurich, Switzerland, and Swiss Finance Institute. · ² Dept. of Business Administration, University of Zurich, Moussonstrasse 15, 8044 Zurich, Switzerland, and Swiss Finance Institute.

Abstract

We 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.

DOI

10.1257/aer.102.3.147

Volume

102

Issue

3

Pages

147-151

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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