Financial innovation and Risk, the Role of Information
AbstractFinancial 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"
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 10/266.
Date of creation: 01 Nov 2010
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Other versions of this item:
- Roberto Piazza, 2010. "Financial innovation and risk: the role of information," Temi di discussione (Economic working papers) 759, Bank of Italy, Economic Research and International Relations Area.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G01 - Financial Economics - - General - - - Financial Crises
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-CTA-2011-01-03 (Contract Theory & Applications)
- NEP-RMG-2011-01-03 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stijn Van Nieuwerburgh & Laura Veldkamp, 2008.
"Information Acquisition and Under-Diversification,"
NBER Working Papers
13904, National Bureau of Economic Research, Inc.
- Gola Carlo & Ilari Antonio, 2013. "Financial innovation oversight: a policy framework," Questioni di Economia e Finanza (Occasional Papers) 200, Bank of Italy, Economic Research and International Relations Area.
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