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Asset holdings, information aggregation in secondary markets and credit cycles

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  • Basso, Henrique S.

Abstract

Imperfect information aggregation in secondary markets of credit has significant consequences for economic cycles. As banks put more weight on mark-to-market gains, they find it optimal to refrain from revealing information about adverse shocks. Consequently, default risk is mispriced, and loan volumes, and thus investment, are not appropriately reduced. Overinvesment lowers the price of capital, leading households to increase consumption without decreasing labour supply, generating a boom. Due to mispricing, banks subsequently face bigger losses and capital depletion. Output then decreases sharply due to credit supply shortages. These instances of market dysfunction are crucial in amplifying credit cycles.

Suggested Citation

  • Basso, Henrique S., 2022. "Asset holdings, information aggregation in secondary markets and credit cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:dyncon:v:138:y:2022:i:c:s0165188922000665
    DOI: 10.1016/j.jedc.2022.104361
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    More about this item

    Keywords

    Information revelation; Credit markets; Mark-to-market; Mispricing; Bank compensation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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