VGSF Finance Research Seminar
Our objective is to understand how ﬁnancial innovation aﬀects investors’ optimal asset-allocation decisions and the economic mechanisms through which these decisions inﬂuence ﬁnancial markets, welfare, and wealth inequality. We show that when some investors, such as households, are less conﬁdent than other investors about the dynamics of the new asset made available by ﬁnancial innovation, but learn over time, many “intuitive” results are reversed: ﬁnancial innovation increases the return volatility and risk premium of the new asset along with volatilities of investors’ portfolios. Despite the increase in volatilities, ﬁnancial innovation improves the welfare of all investors but worsens wealth inequality because experienced investors beneﬁt more from it.
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