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Information acquisition and financial intermediation

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  • Nina Boyarchenko

Abstract

This paper considers the problem of information acquisition in an intermediated market, where the specialists have access to superior technology for acquiring information. These informational advantages of specialists relative to households lead to disagreement between the two groups, changing the shape of the intermediation-constrained region of the economy and increasing the frequency of periods when the intermediation constraint binds. Acquiring the additional information is, however, costly to the specialists, making them less likely to decrease their risky asset holdings when the intermediation constraint binds. I show that this behavior leads the equity capital constraint to bind more frequently, making asset prices in the economy more volatile. I find empirical evidence consistent with these predictions.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 571.

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Date of creation: 2012
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Handle: RePEc:fip:fednsr:571

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Related research

Keywords: Information theory ; Information technology ; Technology - Economic aspects ; Assets (Accounting) ; Households - Economic aspects ; Intermediation (Finance);

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  1. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-55, September.
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  7. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  8. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  9. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  10. Lixin Huang & Hong Liu, 2007. "Rational Inattention and Portfolio Selection," Journal of Finance, American Finance Association, vol. 62(4), pages 1999-2040, 08.
  11. Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2007. "Do industries lead stock markets?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 367-396, February.
  12. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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