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Asset Opacity and Liquidity

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  • Stenzel, A.
  • Wagner, W.B.

    (Tilburg University, Center for Economic Research)

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    Abstract

    Abstract: We consider a model of private information acquisition in which the cost of information depends on an asset's opacity. The model generates a hump-shaped relationship between opacity and the equilibrium amount of private information. In particular, the incentives to acquire information are largest for assets of intermediate opacity; such assets hence display low liquidity in the secondary market due to adverse selection. We also show that costly information acquisition generates incentives to source more correlated assets in the economy, as correlation reduces duplication of information costs. Our ndings have implications for the design of nancial regulation which aim at promoting transparency and reducing correlation in the fi nancial system.

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    Bibliographic Info

    Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2013-066.

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    Date of creation: 2013
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    Handle: RePEc:dgr:kubcen:2013066

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    Web page: http://center.uvt.nl

    Related research

    Keywords: endogenous information acquisition; opacity; asset liquidity;

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    1. Todd Kaplan, 2006. "Why banks should keep secrets," Economic Theory, Springer, vol. 27(2), pages 341-357, January.
    2. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
    3. Bruce Ian Carlin & Shimon Kogan & Richard Lowery, 2013. "Trading Complex Assets," Journal of Finance, American Finance Association, vol. 68(5), pages 1937-1960, October.
    4. Fecht, Falko & Wagner, Wolf, 2007. "The marketability of bank assets and managerial rents: implications for financial stability," Discussion Paper Series 2: Banking and Financial Studies 2007,12, Deutsche Bundesbank, Research Centre.
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