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Information Asymmetry and Risk Transfer Markets

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Abstract

We provide a tractable model of counterparty risk in an intermediated risk transfer market, and analyze the consequences of this risk being private information. We show that unknown type information can be revealed when large trades are observable; however, the allocation is shown to be constrained inefficient. The inefficiency is highlighted by considering the imposition of a transaction tax, which can improve welfare by encouraging more information revelation and increasing risk transfer. The results suggest that increased transparency and/or central counterparty arrangements in over-the-counter derivative markets may promote transparency of counterparty risk.

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  • Eric Stephens & James R. Thompson, 2016. "Information Asymmetry and Risk Transfer Markets," Carleton Economic Papers 16-04, Carleton University, Department of Economics.
    • Handle: RePEc:car:carecp:16-04
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    Cited by:

    1. Bülbül, Dilek & Hakenes, Hendrik & Lambert, Claudia, 2019. "What influences banks’ choice of credit risk management practices? Theory and evidence," Journal of Financial Stability, Elsevier, vol. 40(C), pages 1-14.
    2. Mariana Khapko & Marius Zoican, 2020. "How Fast Should Trades Settle?," Management Science, INFORMS, vol. 66(10), pages 4573-4593, October.

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    Keywords

    Risk Transfer Markets; Asymmetric Information; Counterparty Risk; Regulation;
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