Equilibrium Theory Of Financial Innovation

Financial innovation is the creative reform and research activity of financial institutions and financial administrative authorities, which would rearrange the present institutional settings and operational system, or create a new business or financial instrument. Since 1970s, a diversified trend of international monetary system has been noticed with the corruption of Breeton Woods System. And with the fluctuation of exchange rates and interest rates, people have to face increasing risks when doing international trades and investments. So futures, options and other financial instruments underlying on these derivative instruments are designed to eliminate or decrease the risks that people have to face. Although these new instruments can help people prevent lots of risks, they also provide the speculators with new arbitrage opportunities, and attract large amounts of hot money. As a result these would induce another innovative motivation to eliminate the new speculative risks.With the globalization of financial innovative activity, more and more financial derivatives are traded in financial market, and researches on financial innovation become more and more popular. The study on financial innovation began in 1930s when Keynesianism dominated the economic research and their regulatory policies greatly affected the financial business and system at that time. After the corruption of Breeton Woods Systemin 1970s, there appears a diversified trend of world economic framework. Then the financial innovation was greatly affected by the diversified thoughts. Many representative theories of financial innovation came into being for different schools analyzed the activities of financial innovation from different point of view. These theories demonstrated the formation mechanism of financial innovations through either micro or macro analysis. Nowadays, even under the globalization of finance, these theories still have great directing value for the international financial competition and cooperation and the development of global finance. Affected by factors of traditional market, shocks from complicated international markets and our entry to WTO, domestic banks should accelerate the process of financial computerization and promote the financial innovation to promote the managerial level and then obtain superiority in the competition with the foreign counterparts. The financial innovation is developed to meet the demand of finance itself. Therefore, our research on this subject should keep step with the situation. For the reasons above, this paper analyzed the formation mechanism of financial innovations in a general equilibrium model with a quantified analysis of demand and supply for financial innovations. After that, this paper gives a conclusion to the analysis. Finally, suggestions on policy are put forward on the base of the equilibrium analysis. It is of a great importance to the research of financial innovation in our country, which is just atits beginning stage.Wang Chunhong(Finance) Directed by Piao Minggen...