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Information acquisition and financial intermediation

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Abstract

Informational advantages of specialists relative to households lead to disagreement between the two in an intermediated market. Although households can acquire additional signals to reduce the informational asymmetry, the additional information is costly, making it rational for households to limit the accuracy of the signals they observe. I show that this leads the equity capital constraint to bind more frequently, making the asset prices in the economy more volatile unconditionally. When disagreement between households and specialists is high, however, return volatility decreases. I find empirical evidence consistent with these predictions.

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  • Boyarchenko, Nina, 2012. "Information acquisition and financial intermediation," Staff Reports 571, Federal Reserve Bank of New York, revised 01 Jun 2014.
    • Handle: RePEc:fip:fednsr:571
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    References listed on IDEAS

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    Keywords

    financial intermediation; rational inattention; disagreement;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G00 - Financial Economics - - General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other

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