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Financial innovation and Risk, the Role of Information

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  • Roberto Piazza

Abstract

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"

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/266.

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Length: 31
Date of creation: 01 Nov 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/266

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Keywords: Data collection; Economic models; Financial risk; Information technology; Risk management; investors; financial innovation; investment strategies; hedge; hedge funds; investment choices; stock market; mutual funds; moral hazard; private equity; investment decisions; financial market; liquidity crises; investment risk; increasing returns; investment portfolio; investment policies; competitive markets; financial intermediation; excessive risk; investment securities; external financing; insider trading; investment products; excessive risk taking; bond issuances; high-yield bond; financial intermediaries; reinvestment; bonds; stock market liquidity; derivative; derivative contracts; high-yield bonds; financial economics; financial markets; financial system; financial instruments; bond; expected returns; financial dependence;

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  1. Stijn Van Nieuwerburgh & Laura Veldkamp, 2008. "Information Acquisition and Under-Diversification," NBER Working Papers 13904, National Bureau of Economic Research, Inc.
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Cited by:
  1. 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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