Creativity in the financial market – are consumers close enough to taste it?

This study contributes to the understanding of the empirical linkages between macroeconomic variables and financial markets by examining the impact of financial innovation on consumption volatility. Using a general autoregressive conditional heteroscedasticity (GARCH (1,1)) process the relationship between financial innovation and consumption volatility is estimated. The results reveal that innovations in the form of securitization have contributed to an increase in consumption growth prior to the financial crisis and an increase in consumption volatility throughout the examined period. Suggesting that financial innovation played an important role in the period preceding as well as the aftermath of the financial crisis. In contrast, innovations in the form of derivatives have contributed to a decrease in consumption volatility. Therefore, this study highlights both the ‘bright’ and ‘dark’ sides of financial innovation.