Asset prices and information disclosure under recency-biased learning

Much of the literature on how to avoid bubbles in international financial markets has addressed the role of monetary policy and macroprudential regulation. This paper focuses on the role of information disclosure, which has recently emerged as a new financial risk management tool. It does so in a consumption-based asset pricing model in which fluctuations in asset prices are persistently driven by time-varying expectations due to learning on the fundamental process from agents who weight more recent observations relative to earlier ones. When the regulator knows the true law of motion driving the fundamental process, perfect information disclosure about the unknown fundamental process straightforwardly rules out non-fundamental fluctuations in asset prices. However, as highlighted by various commentators of the recent financial crisis in 2007-2008, the regulator might also have to learn the true fundamental process and be recency-biased. I investigate the consequences of this assumption on the efficiency of public disclosure about the model actual parameter and identify under which conditions on the regulator learning process, information dissemination could have contributed to significantly reduce the boom and bust episode in the US S&P 500 price index in the run-up to the recent financial crisis. I show that persistent imprecision in the regulator’s estimate, which arises as soon as the regulator is recency-biased, can significantly call into question the efficiency of information disclosure for mitigating non-fundamental volatility in asset prices.