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The role of information disclosure in financial intermediation with investment risk

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  • Chen, Yi
  • Du, Kai

Abstract

We study how information disclosure affects financial intermediation when the payoff to the long-term investment is risky. The analysis is based on a business-cycle version of the bank run model wherein a bank provides risk sharing to demand depositors who experience unobservable shocks to their liquidity preferences. The bank pre-commits to the precision of an interim signal regarding the payoff to the long-term investment. We examine the impact of bank disclosure on optimal risk sharing achieved by run-proof, signal-contingent demand-deposit contracts. We show that for utility functions that display non-increasing absolute risk aversion, more informative disclosure improves the ex ante risk sharing provided by financial intermediation.

Suggested Citation

  • Chen, Yi & Du, Kai, 2020. "The role of information disclosure in financial intermediation with investment risk," Journal of Financial Stability, Elsevier, vol. 46(C).
    • Handle: RePEc:eee:finsta:v:46:y:2020:i:c:s1572308919306710
    DOI: 10.1016/j.jfs.2019.100720
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    5. Liu, Yulin & Wang, Junbo & Wen, Fenghua & Wu, Chunchi, 2024. "Climate policy uncertainty and bank systemic risk: A creative destruction perspective," Journal of Financial Stability, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    Financial intermediation; Risk sharing; Disclosure; Non-increasing absolute risk aversion;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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