Financial Innovation and Risk, the Role of Information

WPIEA2010266 Image
Price:  $18.00

Author/Editor: Roberto Piazza
Release Date: © November, 2010
ISBN : 978-1-45521-073-2
Stock #: WPIEA2010266
Stock Status: On back-order

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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"


Business cycles , Capital markets , Economic development , Financial institutions and markets , Investment , Securities markets

More publications in this series: Working Papers

More publications by: Roberto Piazza