Financial Innovation and Financial Fragility

We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive. Financial innovation can make both investors and intermediaries worse off. The model mimics several facts from recent historical experiences, and points to new avenues for financial reform.Financial Innovation, Financial Fragility, Securities, Risks

Radical Financial Innovation

Radical financial innovation is the development of new institutions and methods that permit risk management to be extended far beyond its former realm, covering important new classes of risks. This paper compares past such innovation with potential future innovation, looking at the process that produced past success and the possibilities for future financial innovation.Risk management, Institutions, Incomplete markets, Livelihood insurance, Behavioral finance, Livelihood risks, Home equity insurance, Country risks

FINANCIAL ASPECTS OF INNOVATION IN LOCAL

Elena Dotsenko. FINANCIAL ASPECTS OF INNOVATION IN LOCAL/. Wiższa Szkoła Bankowa we Wroclawiu, Wroclaw. Poland. 2011The article highlighted the basic problem of financing innovation development in Ukraine and discussed the types of financial resources that can promote innovation, and give reasons for lack of budget funding. Due to limited budgetary innovative development at the local level, to review the functions of local authorities and the proposed indirect methods of influence on the process of financing innovation

Skills, social insurance, and changes in innovation investment after the onset of the financial crisis in Europe

This paper compares investments in innovation from the early days of the financial crisis up to mid 2009 using a survey covering more than 5,000 firms across twenty one European countries. Our interest is in how differences in labour market institutions and human capital affect a firm’s innovation investment during the recent financial crisis. We find that continuity of investment in innovation in Europe during the onset of the financial crisis in 2008-9 was strongest in countries which have both high earnings replacement rates and high participation in vocational education and training; countries with just one were more likely to see reduced innovation, while we find no effect (either positive or negative) from job security

Neglected risks, financial innovation and financial fragility

We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.

Financial constraints, innovation performance, and sectoral disaggregation

How do the effects of financial constraints on innovation performance vary by sector and firm characteristics? This paper uses innovation survey data from eleven European countries to examine the heterogeneity of these effects. So far, there has been a lack of cross-country micro-level studies exploring the effects of financial constraints on innovation performance in Western Europe and only little research about the variability of such effects between the broad sectors of production and services. Our results suggest that the impact of direct measures of financial barriers differs in production and services sectors, and also by the firm’s export orientation. In particular, financial constraints appear to have more pronounced negative effects in the production sector than in the services sector. Among different types of firms, the response to financial constraints seems to be stronger for non-exporters

Controlling price volatility through financial innovation

In this paper, the authors study the possibility of controlling asset price volatility through financial innovation in a three-period finite competitive exchange economy with incomplete financial markets and retrading.incomplete markets; financial innovation; volatility

Financial constraints and innovation: Why poor countries don't catchup

We examine micro-level channels of how financial development can affect macroeconomic outcomes like the level of income and export intensity. We investigate theoretically and empirically how financial constraints affect a firm's innovation and export activities, using unique firm survey data which provides direct measures for innovations and firm-specific financial constraints. We find that financial constraints restraint heability of domestically owned firms to innovate and export and hence to catch up to the technological frontiers. This negative effect is amplified as financial constraints force export and innovation activities to become substitutes although they are generally natural complements