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Financial InnovationToo Much or Too Little?$
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Michael Haliassos

Print publication date: 2013

Print ISBN-13: 9780262018296

Published to MIT Press Scholarship Online: January 2015

DOI: 10.7551/mitpress/9780262018296.001.0001

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Market Efficiency, Rational Expectations, and Financial Innovation

Market Efficiency, Rational Expectations, and Financial Innovation

Chapter:
(p.231) 11 Market Efficiency, Rational Expectations, and Financial Innovation
Source:
Financial Innovation
Author(s):

Michael Haliassos

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262018296.003.0011

This chapter draws from the author's past research and related literature to highlight the important linkages between the real economy and financial markets. Factors such as GDP growth, default risk and investment growth rates are presented as examples of significant drivers of returns in risky assets. Such factors have also been successful in explaining various long-standing asset pricing anomalies, suggesting that markets appear rather efficient when financial assets are priced using economic fundamental factors. This approach emphasizes the search for a better understanding of the underlying factor structure of asset returns as it relates to the real economy, and has the potential to lead to a more effective risk management framework. Financial innovation is viewed as a means to make markets more complete so that risk-sharing can be improved. It is therefore considered a necessary and important ingredient of the evolution of our financial system.

Keywords:   Real economy, Risk premia, Anomalies, Behavioral finance, Market efficiency, Innovation

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