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Government insurance, information, and asset prices

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  • Lopomo Beteto Wegner, Danilo

Abstract

An investment decision problem is studied, in a framework where the government offers insurance against the possibility of the price of a risky asset falling drastically. The problem is considered under different informational scenarios, i.e., information quality, under which agents have to infer the state of fundamentals of the economy. Changes in information quality is shown to affect equilibrium prices despite no concomitant changes in the fundamentals, creating excess volatility. The possibility of government intervention is shown to increase equilibrium prices, which can be ordered as a function of information quality. Empirical evidence supporting the model is presented.

Suggested Citation

  • Lopomo Beteto Wegner, Danilo, 2015. "Government insurance, information, and asset prices," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 165-183.
    • Handle: RePEc:eee:reveco:v:37:y:2015:i:c:p:165-183
    DOI: 10.1016/j.iref.2014.11.021
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    More about this item

    Keywords

    Government insurance; Information quality; Asset prices;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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