Financial Innovation and Price Volatility

Citanna, Alessandro

doi:10.2139/ssrn.260912

Cited by 2 publications

(2 citation statements)

References 14 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Hence in this setting efficient financial innovation can be seen as a coordination problem (Citanna and Villanacci (1996)) which we solve by introducing communication. Before closing note that the condition K ≥ I − 1 is not tight since to some extent agents' excess demands can also be spanned by the stock markets.…”

Section: Example 1 (Continued)mentioning

confidence: 99%

See 1 more Smart Citation

Financial Innovation, Communication and the Theory of the Firm

Bettzüge

Hens

2000

SSRN Journal

View full text Add to dashboard Cite

When markets are incomplete, the competitive equilibria considered so far are not constrained Pareto-efficient, production efficiency breaks down and shareholders no longer agree on the objective function of the firm.We first show by way of an example that these inefficiencies can result from the double role of firms in incomplete markets: providing high market value and providing good hedging opportunities (spanning role).To disentangle these two conflicting roles of the firm's decision, we then suggest to let the firm choose a relevant financial policy by issuing securities being collaterized by the production plan. In order to guarantee that the firm does not choose to innovate trivial assets, it is then shown to be crucial that the firm's shareholders agree on the same set of state prices. Therefore we introduce some communication network into the model which allows the shareholders to exchange their views on the firm's best policies. In our main result we demonstrate that competitive equilibria with communication of shareholders and a relevant financial policy of the firm are Pareto-efficient, provided there are at least as many firms as there are shareholders.

show abstract

Section: Example 1 (Continued)mentioning

confidence: 99%

“…Thus, the decision rule suggested by Citanna and Villanacci (1996) can be interpreted as the special case of the decision rule suggested here, when production sets are given by Y k ⊂ IR S+1 − for k = 1, . .…”

mentioning

confidence: 99%