Financial Innovation and Risk, the Role of Information

November 1, 2010

Preview Citation

Format: Chicago

Roberto Piazza. Financial Innovation and Risk, the Role of Information, (USA: International Monetary Fund, 2010) accessed November 8, 2024

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"

Subject: Business cycles, Financial sector development, Moral hazard, Systemic risk, Technology

Keywords: Appendix E, Business cycle, Mover accent, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/266
Stock No:

WPIEA2010266
ISBN:

9781455210732
ISSN:

1018-5941

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