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Stress tests and information disclosure

Author

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  • Itay Goldstein
  • Yaron Leitner

Abstract

Supersedes Working Paper 13-26 . We study an optimal disclosure policy of a regulator that has information about banks? ability to overcome future liquidity shocks. We focus on the following tradeoff: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (the Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We relate our results to the Bayesian persuasion literature and to the debate on disclosure of stress test results.

Suggested Citation

  • Itay Goldstein & Yaron Leitner, 2015. "Stress tests and information disclosure," Working Papers 15-10, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:15-10
    Note: Superseded by WP 17-28
    as

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    References listed on IDEAS

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    1. Morrison, Alan D. & White, Lucy, 2013. "Reputational contagion and optimal regulatory forbearance," Journal of Financial Economics, Elsevier, vol. 110(3), pages 642-658.
    2. Miguel Faria-e-Castro & Joseba Martinez & Thomas Philippon, 2017. "Runs versus Lemons: Information Disclosure and Fiscal Capacity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(4), pages 1683-1707.
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    7. Alvarez, Fernando & Barlevy, Gadi, 2021. "Mandatory disclosure and financial contagion," Journal of Economic Theory, Elsevier, vol. 194(C).
    8. Edward Simpson Prescott, 2008. "Should bank supervisors disclose information about their banks?," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 94(Win), pages 1-16.
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    12. Gick, Wolfgang & Pausch, Thilo, 2013. "Bayesian Persuasion By Stress Test Disclosure," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79913, Verein für Socialpolitik / German Economic Association.
    13. Michael Ostrovsky & Michael Schwarz, 2010. "Information Disclosure and Unraveling in Matching Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 2(2), pages 34-63, May.
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    Cited by:

    1. Garcia, Daniel & Tsur, Matan, 2021. "Information design in competitive insurance markets," Journal of Economic Theory, Elsevier, vol. 191(C).
    2. Dmitry Orlov & Pavel Zryumov & Andrzej Skrzypacz, 2023. "The Design of Macroprudential Stress Tests," The Review of Financial Studies, Society for Financial Studies, vol. 36(11), pages 4460-4501.
    3. Rosar, Frank, 2017. "Test design under voluntary participation," Games and Economic Behavior, Elsevier, vol. 104(C), pages 632-655.
    4. Fausto Pacicco & Luigi Vena & Andrea Venegoni, 2017. "Full disclosure and financial stability: how does the market digest the transparency shock?," LIUC Papers in Economics 305, Cattaneo University (LIUC).
    5. Carboni, Marika & Fiordelisi, Franco & Ricci, Ornella & Lopes, Francesco Saverio Stentella, 2017. "Surprised or not surprised? The investors’ reaction to the comprehensive assessment preceding the launch of the banking union," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 122-132.
    6. Jungherr, Joachim, 2018. "Bank opacity and financial crises," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 157-176.
    7. Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2015. "Liquidity hoarding and interbank market rates: The role of counterparty risk," Journal of Financial Economics, Elsevier, vol. 118(2), pages 336-354.
    8. Michal Kowalik, 2016. "Opacity and Disclosure in Short-Term Wholesale Funding Markets," Supervisory Research and Analysis Working Papers RPA 16-2, Federal Reserve Bank of Boston.

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    More about this item

    Keywords

    Bayesian persuasion; Optimal disclosure; Stress tests;
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