European Business Schools Librarian's Group

Les Cahiers de Recherche,
HEC Paris

No 685: Financial Innovation and Price Volatility

CITANNA Alessandro

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.

Keywords: Incomplete markets; financial innovation; volatility

JEL-codes: C60; D52; G10

30 pages, October 16, 1999

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