FINANCIAL MARKET INNOVATION AND SECURITY DESIGN - AN INTRODUCTION

The article describes, in the context of theory and practice, this special issue of the Journal of Economic Theory on financial market innovation and security design. The main focus is on security design in incomplete financial markets, possibly with asymmetrically informed traders. We first survey the general equilibrium literature, which emphasizes the spanning role of securities. We then provide a unified framework encompassing the literature that employs a CARA-Gaussian setting to study the impact of financial innovation on risk-sharing and information aggregation. Journal of Economic Literature Classification Numbers G10, D52. (C) 1995 Academic Press, Inc.