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Information Losses in a Dynamic Model of Credit

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  • Lang, William W
  • Nakamura, Leonard I

Abstract

type="main" xml:lang="en"> This paper examines dynamic information losses associated with loan terminations. We assume that the aggregated returns of current borrowers contain information about the mean returns to future borrowers. In a competitive loan market, the value of this information is not fully internalized by individual borrowers and lenders, and loan decisions fail to be first best. Introducing heterogeneous borrowers, who know their own risk characteristics better than lenders, safer borrowers are less willing to borrow when risk premia rise. As they cease borrowing, the information generated in credit markets becomes noisier and this tends to increase risk premia. The model produces alternating and persistent periods of “tight” and “loose” credit.
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Suggested Citation

  • Lang, William W & Nakamura, Leonard I, 1989. " Information Losses in a Dynamic Model of Credit," Journal of Finance, American Finance Association, vol. 44(3), pages 730-746, July.
  • Handle: RePEc:bla:jfinan:v:44:y:1989:i:3:p:730-46
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    Cited by:

    1. DeYoung, Robert & Goldberg, Lawrence G. & White, Lawrence J., 1999. "Youth, adolescence, and maturity of banks: Credit availability to small business in an era of banking consolidation," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 463-492, February.
    2. Shaffer, Sherrill, 2002. "Competitive bank pricing and adverse selection, with implications for testing the SCP hypothesis," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 633-647.
    3. Pigini, Claudia & Presbitero, Andrea F. & Zazzaro, Alberto, 2016. "State dependence in access to credit," Journal of Financial Stability, Elsevier, vol. 27(C), pages 17-34.
    4. Ghossoub, Edgar A., 2012. "Liquidity risk and financial competition: Implications for asset prices and monetary policy," European Economic Review, Elsevier, vol. 56(2), pages 155-173.
    5. Shaffer, Sherrill & Hoover, Scott, 2008. "Endogenous screening, credit crunches, and competition in laxity," Review of Financial Economics, Elsevier, vol. 17(4), pages 296-314, December.
    6. Lawrence J. White, 1996. "International Regulation of Securities Markets: Competition or Harmonization?," NBER Chapters,in: The Industrial Organization and Regulation of the Securities Industry, pages 207-242 National Bureau of Economic Research, Inc.

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