Financial innovation and market risk premiums

The Wall Street Journal article entitled “The Risk Business” provides an excellent explanation concerning the impact of financial innovation on risk premiums in the global financial markets. The article asks why, in an undeniably dangerous world, risk premiums seem to have drained out of whole classes of financial assets. The answer is that financial innovation (in all its various forms, including the buying, selling, swapping, trading and securitization of risk) has actually made the financial markets much safer for investors by facilitating optimal risk sharing; consequently risk premiums have fallen substantially over time. This is good news, since with better risk sharing gives rise to a more robust and resilient global economy over time.

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