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Financial Innovation and Portfolio Risks

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  • Alp Simsek

Abstract

I illustrate the effect of financial innovation on portfolio risks by using an example with risk-sharing needs and belief disagreements. I consider two types of innovation: product innovation, formalized as an expansion of new financial assets; and process innovation, formalized as a reduction in transaction costs. When belief disagreements are large, both types of innovation increase portfolio risks. Moreover, endogenous financial innovation is directed towards speculative assets that increase portfolio risks.

Suggested Citation

  • Alp Simsek, 2013. "Financial Innovation and Portfolio Risks," American Economic Review, American Economic Association, vol. 103(3), pages 398-401, May.
    • Handle: RePEc:aea:aecrev:v:103:y:2013:i:3:p:398-401
    Note: DOI: 10.1257/aer.103.3.398
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    References listed on IDEAS

    as
    1. 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.
    2. Stefano G. Athanasoulis & Robert J. Shiller, 2001. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities," American Economic Review, American Economic Association, vol. 91(4), pages 1031-1054, September.
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    Cited by:

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    2. Li, Xindan & Subrahmanyam, Avanidhar & Yang, Xuewei, 2018. "Can financial innovation succeed by catering to behavioral preferences? Evidence from a callable options market," Journal of Financial Economics, Elsevier, vol. 128(1), pages 38-65.
    3. Li, Xiao-Lin & Li, Haofei & Ge, Xinyu & Si, Deng-Kui, 2023. "Capital market liberalization and systemic risk of non-financial firms: Evidence from Chinese Stock Connect scheme," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    4. Guerdjikova, A. & Quiggin, J., 2020. "Financial market equilibrium with bounded awareness," Working Papers 2020-10, Grenoble Applied Economics Laboratory (GAEL).
    5. Ma, Yechi & Ahmad, Ferhana & Liu, Miao & Wang, Zilong, 2020. "Portfolio optimization in the era of digital financialization using cryptocurrencies," Technological Forecasting and Social Change, Elsevier, vol. 161(C).
    6. Atilgan, Yigit & Demirtas, K. Ozgur & Gunaydin, A. Doruk & Oztekin, Mustafa, 2024. "Performance implications of hedging with industry ETFs," Global Finance Journal, Elsevier, vol. 61(C).
    7. Shiyang Huang & Maureen O’Hara & Zhuo Zhong, 2021. "Innovation and Informed Trading: Evidence from Industry ETFs [Short interest, institutional ownership, and stock returns]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1280-1316.
    8. Shawn Cole & Benjamin Iverson & Peter Tufano, 2022. "Can Gambling Increase Savings? Empirical Evidence on Prize-Linked Savings Accounts," Management Science, INFORMS, vol. 68(5), pages 3282-3308, May.
    9. Bernales, Alejandro & Reus, Lorenzo & Valdenegro, Víctor, 2022. "Speculative bubbles under supply constraints, background risk and investment fraud in the art market," Journal of Corporate Finance, Elsevier, vol. 77(C).
    10. Osman, Myriam Ben & Galariotis, Emilios & Guesmi, Khaled & Hamdi, Haykel & Naoui, Kamel, 2023. "Diversification in financial and crypto markets," International Review of Financial Analysis, Elsevier, vol. 89(C).
    11. Davydov, Denis & Florestedt, Otto & Peltomäki, Jarkko & Schön, Marcus, 2017. "Portfolio performance across genders and generations: The role of financial innovation," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 44-51.
    12. Gao, George P. & Lu, Xiaomeng & Song, Zhaogang & Yan, Hongjun, 2019. "Disagreement beta," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 96-113.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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