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Information asymmetry and risk transfer markets

Author

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  • Stephens, Eric
  • Thompson, James R.

Abstract

We provide a tractable model of counterparty risk in a risk transfer market, and analyze the consequences of this risk being private information. We show that unknown type information can be revealed in the presence of a large trader identification policy; however, the market allocation is shown to be constrained inefficient. The inefficiency is highlighted by considering the imposition of a transaction tax, which can improve welfare by encouraging more information revelation and increasing risk transfer. The results suggest that increased transparency and/or central counterparty arrangements in over-the-counter derivative markets may promote transparency of counterparty risk.

Suggested Citation

  • Stephens, Eric & Thompson, James R., 2017. "Information asymmetry and risk transfer markets," Journal of Financial Intermediation, Elsevier, vol. 32(C), pages 88-99.
  • Handle: RePEc:eee:jfinin:v:32:y:2017:i:c:p:88-99
    DOI: 10.1016/j.jfi.2017.05.003
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