A few look-ins at their largely theoretical paper:
* "Our main result is to show that introducing a new derivative security that improves risk
sharing leads to an increase in the volatility of the stock market of stock returns is higher in the economy with improved risk sharing if the discount rate is countercyclical, because the change in the discount rate magnifies the effect on stock returns of a shock to dividends; this condition is satisfied if the average prudence in the economy is not too large."
* The logic behind their conclusion is that:
"In the economy without the derivative, agents cannot share risk at all, and so the distribution of wealth across agents changes only deterministically. Consequently, the discount rate is deterministic, and so there is no excess volatility over and above fundamental volatility. But with the introduction of a non-redundant derivative risk sharing is possible, and hence, the discount rate is stochastic."Interesting. And I confess it does make sense. Even though it may take a second reading to convince me of all of it.
Cite: Bhamra, Harjoat Singh and Uppal , Raman, "The Effect of Introducing a Non-Redundant Derivative on the Volatility of Stock-Market Returns" (March 14, 2006). Sauder School of Business Working Paper Available at SSRN: http://ssrn.com/abstract=891002