%0 Journal Article %1 Gennaioli2012452 %A Gennaioli, Nicola %A Shleifer, Andrei %A Vishny, Robert %D 2012 %J Journal of Financial Economics %K expectations finance local_expectations market_microstructure financial innovation systemic_risk %N 3 %P 452 - 468 %R 10.1016/j.jfineco.2011.05.005 %T Neglected risks, financial innovation, and financial fragility %U http://www.sciencedirect.com/science/article/pii/S0304405X11001176 %V 104 %X 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 the safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.

@article{Gennaioli2012452, abstract = {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 the safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.}, added-at = {2013-03-08T01:05:05.000+0100}, author = {Gennaioli, Nicola and Shleifer, Andrei and Vishny, Robert}, biburl = {https://www.bibsonomy.org/bibtex/22014e51510d5008bc16a66b649f8ea08/jp}, description = {ScienceDirect.com - Journal of Financial Economics - Neglected risks, financial innovation, and financial fragility}, doi = {10.1016/j.jfineco.2011.05.005}, interhash = {6d84ae687c6b4487771c1f71df0eaa7d}, intrahash = {2014e51510d5008bc16a66b649f8ea08}, issn = {0304-405X}, journal = {Journal of Financial Economics}, keywords = {expectations finance local_expectations market_microstructure financial innovation systemic_risk}, note = {Market Institutions, Financial Market Risks and Financial Crisis}, number = 3, pages = {452 - 468}, timestamp = {2013-05-10T03:18:31.000+0200}, title = {Neglected risks, financial innovation, and financial fragility}, url = {http://www.sciencedirect.com/science/article/pii/S0304405X11001176}, volume = 104, year = 2012 }