Security baskets and index-lined securities are securities whose values are functions of the cash flows or values of other assets. Creation of these "composite" securities would seem to be redundant since investors can cost1ess1y replicate them. In this paper we study the existence and optimal...

Financial Derivatives have established themselves as a major driving force in the international monetary sphere in the recent past. Financial Derivatives were originally used as an effective monetary instrument to multiply the wealth through ripple effect, of late, these instruments are also...

We analyze how speculative financial innovation affects stock prices, risk premiums, market liquidity, and investor welfare in an economy with heterogeneous beliefs. When investors disagree about the covariance of the newly introduced stocks with the original stocks, we show that financial...