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Financial innovation and risk: the role of information

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  • Roberto Piazza

    (International Monetary Fund)

Abstract

Financial innovation has increased opportunities for diversification and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies compared with passive (less informed) strategies. What are the consequences? I have studied 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 in avoiding excessively risky investments. Financial innovation lowers the incentives for private information collection and causes a deterioration in public information: the economy more often invests in excessively risky technologies. This changes the properties of the business cycle and can reduce welfare by increasing the likelihood of �liquidation crises".

Suggested Citation

  • Roberto Piazza, 2010. "Financial innovation and risk: the role of information," Temi di discussione (Economic working papers) 759, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_759_10
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    Cited by:

    1. Gola, Carlo & Ilari, Antonio, 2015. "Financial innovation oversight: a policy framework," Journal of Financial Perspectives, EY Global FS Institute, vol. 3(1), pages 59-100.
    2. Mustansar, Talreja, 2023. "Financial innovation, technological improvement and bank’ profitability," OSF Preprints 8wy95, Center for Open Science.
    3. repec:bcp:journl:v:3:y:2019:i:11:p:559-570 is not listed on IDEAS
    4. Tibor Erményi, 2015. "Evaluating Investment Profitability and Business Controlling Methods," Proceedings- 11th International Conference on Mangement, Enterprise and Benchmarking (MEB 2015),, Óbuda University, Keleti Faculty of Business and Management.

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    More about this item

    Keywords

    Financial innovation; information collection; great moderation; liquidation crisis;
    All these keywords.

    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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