Financial Innovation

Financial Innovation

Introduction

Since the beginning of 1970-1980 financial markets are marked by financial innovation. Financial innovation is both the cause and consequence of three major structural changes: the development of quantitative economics and management of balance sheets, the rise of new information technologies and communications and liberalization or deregulation of the economy. Financial innovation has been particularly marked by the development of techniques for project finance, the asset finance, funds to leverage (LBO), the structured finance techniques of balance sheet management (management of liabilities with the defeasance and asset management with the securitization), the techniques of portfolio management and derivatives Financial innovation has had as main objective to facilitate the development of credit in particular credit markets. It transformed the nature of capital, created "quasi equity" and in fact sought to erase the difference between various forms of capital inflows. It has consequently transformed the concept of ownership. Therefore, all the issues related to financial innovation will be discussed in detail.

Discussion

Financial innovation was supposed to reduce risk, but there have been many financial crises over the past twenty years. This was the case for example in 1987, the Asian crisis, and the subprime crisis. The last thirty years were also punctuated by the explosion and the creation of successive bubbles. At the heart of financial innovation is found by the development of financial engineering products and in particular credit derivatives. Derivatives markets have experienced strong growth in recent years, both from a quantitative and qualitative. Financial innovation has been developed based on use of actuarial techniques and legal and financial engineering. It developed taking advantage of the banking deregulation (Bradford, 1971, 439).

Mortgages involve the use of legal arrangements, contractual and corporate, creative accounting, and statistical analysis techniques for risk calculations in the framework of a model of financial markets. Financial innovation has the dogmatic belief in the benefits of modernity. The argument prevailed that these innovations would facilitate the allocation of risk among economic agents, and risk sharing would improve the functioning of the financial system. This risk management would allow funding for efficiency projects, which are also risky projects, and allowing investors to better manage their asset portfolio. Apart from the risk sharing that takes place more easily the financial innovations contribute, theoretically, to market efficiency. This requires a reduction of transaction costs greater liquidity of markets, incentives for the collection and dissemination of information. The debate on financial innovations joined on the virtues and dangers of speculation. For the classical economists, speculators have a stabilizing effect on the markets in wanting to buy securities when market prices are low and sellers when are high, they lessen the extreme variations. However, this view assumes that agents adopt strategies in the medium term to long term, the time that asset prices return to their fundamental value (Clarke, 1998, 132).

Financial innovation has used the analysis of quantitative economics, modeling techniques and mathematical formulas to claim that the products it developed was not speculative and that they reduce ...