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Financial Innovation and Risk, the Role of Information

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  • Mr. Roberto Piazza

Abstract

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"

Suggested Citation

  • Mr. Roberto Piazza, 2010. "Financial Innovation and Risk, the Role of Information," IMF Working Papers 2010/266, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2010/266
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    References listed on IDEAS

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    1. Stijn Van Nieuwerburgh & Laura Veldkamp, 2010. "Information Acquisition and Under-Diversification," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 779-805.
    2. Bank for International Settlements, 2008. "Private equity and leveraged finance markets," CGFS Papers, Bank for International Settlements, number 30, december.
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    Cited by:

    1. Mustansar, Talreja, 2023. "Financial innovation, technological improvement and bank’ profitability," OSF Preprints 8wy95, Center for Open Science.
    2. 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.
    3. 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.
    4. repec:bcp:journl:v:3:y:2019:i:11:p:559-570 is not listed on IDEAS

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