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Financial innovation and risk: the role of information

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  • Roberto Piazza

    (International Monetary Fund)

Abstract

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

  • Roberto Piazza, 2010. "Financial innovation and risk: the role of information," 2010 Meeting Papers 73, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:73
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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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    More about this item

    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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