Financial Innovation and Risk, The Role of Information

 
Author/Editor: Piazza, Roberto
 
Publication Date: November 01, 2010
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: Financial innovation has increased diversification opportunities and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies relative to passive (less informed) strategies. What are the consequences? I study an economy with linear production technologies, some more risky than others. Investors can use low quality public information or collect high quality, but costly, private information. Information helps avoiding excessively risky investments. Financial innovation lowers the incentives for private information collection and deteriorates public information: the economy invests more often in excessively risky technologies. This changes the business cycle properties and can reduce welfare by increasing the likelihood of "liquidation crises"
 
Series: Working Paper No. 10/266
Subject(s): Business cycles | Data collection | Economic models | Financial risk | Information technology | Investment | Risk management | Securities markets | United States

Author's Keyword(s): Financial innovation | information | great moderation | liquidation crisis.
 
English
Publication Date: November 01, 2010
Format: Paper
Stock No: WPIEA2010266 Pages: 31
Price:
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