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Focusing on capital markets, the course aims at introducing the basics about financial innovation. However, before going further into the concept of financial innovation, a few reminders about the financial markets are necessary.
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The allocation of rare resources can be performed via different ways: lottery, queuing, auction, reservation or market. Among others, markets facilitate the allocation of resources: their purpose is to improve the price discovery process, reduce the cost of transacting and enhance liquidity. Markets are places where resources are exchanged between buyersand sellers. By extension, markets refer to transactions of these resources.
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After introducing this course by presenting some background on financial markets as they are today, we will now study their origins and what has been the role of financial innovation in the development of the financial system over the course of history. We have now known for more than half a century that financial markets, in their primitive form, have existed since antiquity. The purpose of this chapter is to explore some historical financial innovations in order to understand the role of key inventions in the development of finance.
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In the last chapter, we investigated the origins of the financial system. Moreover, we asked what has been the role of financial innovation in the development of the financial system over the course of history. We learnt that financial innovation has always existed. In this chapter, we will (finally) define what financial innovation is.
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This lecture aims to describe the origins of financial innovation. After having defined this concept through a historical approach and then through its taxonomy, we will now explore the causes and motivations behind all financial innovation. Why do we innovate in finance? What were the common points between the motivations of the Babylonians who invented the interest rate during Antiquity and the motivations of the financial engineers who, today, are developing decision support tools based on artificial intelligence?
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In economics, most innovations that endure allow for a better allocation of rare resources and are beneficial to all over the long term. However, some innovations can have negative consequences for some and benefits for others. Other innovations - or rather fake innovations - are in fact just a remix of existing products or methods.
Lecture - Slides - Financial Innovation - 2021 - Part 1.pdfCourse description (UCLouvain website): [click here]
Major International Finance (UCLouvain website): [click here]
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