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Financial Innovation and Risk, the Role of Information


  • Roberto Piazza


Financial innovation has increased diversification opportunities and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies relative to passive (less informed) strategies. What are the consequences? I study an economy with linear production technologies, some more risky than others. Investors can use low quality public information or collect high quality, but costly, private information. Information helps avoiding excessively risky investments. Financial innovation lowers the incentives for private information collection and deteriorates public information: the economy invests more often in excessively risky technologies. This changes the business cycle properties and can reduce welfare by increasing the likelihood of "liquidation crises"

Suggested Citation

  • Roberto Piazza, 2010. "Financial Innovation and Risk, the Role of Information," IMF Working Papers 10/266, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/266

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    Cited by:

    1. Gola Carlo & Ilari Antonio, 2013. "Financial innovation oversight: a policy framework," Questioni di Economia e Finanza (Occasional Papers) 200, Bank of Italy, Economic Research and International Relations Area.
    2. Tibor Erményi, 2015. "Evaluating Investment Profitability and Business Controlling Methods," Volume of Management, Enterprise and Benchmarking in the 21st century II, Óbuda University, Keleti Faculty of Business and Management.

    More about this item


    Data collection; Business cycles; Financial risk; Economic models; Information technology; Investment; Risk management; Securities markets; United States; investors; financial innovation; investment strategies; hedge; hedge funds; Information; Great Moderation; Liquidation Crisis; General Financial Markets;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G01 - Financial Economics - - General - - - Financial Crises
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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