Liquidity Insurance with Market Information

2020 ◽  
Author(s):  
Luigi Iovino
Keyword(s):  
Asymmetric Information ◽  
Stock Prices ◽  
Multiple Equilibria ◽  
Investment Banks ◽  
Equilibrium Path ◽  
Truth Telling ◽  
Market Signals ◽  
Price Signals ◽  
Ex Post ◽  
Liquidity Insurance

Abstract This paper studies how market signals—such as stock prices—can help alleviate the severity of the asymmetric information problem in credit and liquidity management. Asymmetric information hinders the ability of borrowers (firms, investment banks, etc.) to undertake profitable investment opportunities and to insure themselves against liquidity shocks. I show that on the equilibrium path creditors do not learn anything from market signals because they can use a menu of contracts to screen the different types of borrowers. However, by conditioning liquidity insurance on ex post price signals, creditors are able to provide the borrowers with better incentives for truth telling. At the same time, prices depend on the liquidity that creditors offer to the borrowers. This two-way feedback impacts the design of the optimal contract and potentially generates multiple equilibria in financial markets.

scholarly journals Social Preferences, Public Policy, and Gender

2017 ◽  
Author(s):  
Philipp Zahn ◽  
Evguenia Winschel
Keyword(s):  
Asymmetric Information ◽  
Prosocial Behavior ◽  
Social Preferences ◽  
Policy Reform ◽  
Strategic Interaction ◽  
Detailed Knowledge ◽  
Symmetric Information ◽  
Ex Post ◽  
And Gender ◽  
Ex Post Analysis

In most laboratory experiments concerning prosocial behavior subjects are fully informed how their decision influences the payoff of other players. Outside the laboratory, for instance when voting for a policy reform proposal, individuals typically have to decide without such detailed knowledge. To assess the effect of information asymmetries on prosocial behavior, we conduct a laboratory experiment with a simple non-strategic interaction. A dictator has only limited knowledge about the benefits his prosocial action generates for a recipient. We observe subjects with heterogenous social preferences, in particular inequalityaverse and efficiency-concerned individuals. While under symmetric information only individuals with the same type of preferences transfer, under asymmetric information different types transfer at the same time. As a consequence and the main finding of our experiment, uninformed dictators behave more prosocially than informed dictators. In an ex-post analysis of our experiment we also find that the differences in behavior under symmetric information are mostly driven by gender: women tend to be more inequality-averse, men tend to be more efficiency-concerned. Yet, both transfer under asymmetric information.

Preventing Crime Waves

2010 ◽  
Vol 2 (3) ◽  
pp. 138-159 ◽  
Author(s):  
Philip Bond ◽  
Kathleen Hagerty
Keyword(s):  
Multiple Equilibria ◽  
Costs And Benefits ◽  
Net Benefit ◽  
Ex Post ◽  
Ex Ante ◽  
Crime Wave ◽  
Enforcement Mechanisms

We study the design of enforcement mechanisms when enforcement resources are chosen ex ante and are inelastic ex post. Multiple equilibria arise naturally. We identify a new answer to the old question of why non-maximal penalties are used to punish moderate actions: “marginal” penalties are much more attractive in the Pareto inferior crime wave equilibrium. Specifically, although marginal penalties have both costs and benefits, the net benefit is strictly positive in the crime wave equilibrium. In contrast, marginal penalties frequently have a net cost in the noncrime wave equilibrium. We also show that increasing enforcement resources may worsen crime. (JEL D82, K42)

scholarly journals Beyond Truth-Telling: Preference Estimation with Centralized School Choice and College Admissions

2019 ◽  
Vol 109 (4) ◽  
pp. 1486-1529 ◽  
Author(s):  
Gabrielle Fack ◽  
Julien Grenet ◽  
Yinghua He
Keyword(s):  
School Choice ◽  
Test Scores ◽  
Real Life ◽  
Truth Telling ◽  
Student Preferences ◽  
Ex Post ◽  
Is Strategy ◽  
Deferred Acceptance ◽  
Strategy Proof ◽  
Novel Approaches

We propose novel approaches to estimating student preferences with data from matching mechanisms, especially the Gale-Shapley deferred acceptance. Even if the mechanism is strategy-proof, assuming that students truthfully rank schools in applications may be restrictive. We show that when students are ranked strictly by some ex ante known priority index (e.g., test scores), stability is a plausible and weaker assumption, implying that every student is matched with her favorite school/college among those she qualifies for ex post. The methods are illustrated in simulations and applied to school choice in Paris. We discuss when each approach is more appropriate in real-life settings. (JEL D11, D12, D82, I23)

Assessment of Asymmetric Information Cost in Indian Stock Market: A Sectoral Approach

2020 ◽  
pp. 097215091986508
Author(s):  
Aritra Pan ◽  
Arun Kumar Misra
Keyword(s):  
Asymmetric Information ◽  
Stock Prices ◽  
Trading Volume ◽  
Share Price ◽  
Return Volatility ◽  
Information Cost ◽  
Market Conditions ◽  
Price Variation ◽  
Bid Ask Spread ◽  
The Impact

Bid-ask spread, along with profit, also encompass the impact of asymmetric information cost and order processing cost. Asymmetric information influences stock prices with varying degree of investors’ perception. Estimation of asymmetric information cost and its determinants have been explored significantly under low-frequency trading. The literature hardly attempts to study asymmetric information cost under high-frequency trading (HFT). Asymmetric information cost significantly influences bid-ask spread, and hence the nature of its impact under different market conditions needs to be analyzed under HFT. The study attempts to estimate asymmetric information cost in HFT and analyze its determinants under different industry sectors and market conditions. The study followed Affleck-Graves et al. (1994 , The Journal of Finance, 49(4), 1471–1488) model to estimate the asymmetric information cost using 5 minutes interval data for a period of 82 trading days. Information gets reflected in equity through the movement in price, variation in trading volume, and return volatility. The study has found share price, traded volume, return volatility and trading frequency as the major determinants of asymmetric information cost in different market conditions. The findings of the study have significant implications for market microstructure for trading, lowering information asymmetry in market and enhancing market quality.

scholarly journals LEARNING FROM THE EXPECTATIONS OF OTHERS

2008 ◽  
Vol 12 (3) ◽  
pp. 345-377 ◽  
Author(s):  
JIM GRANATO ◽  
ERAN A. GUSE ◽  
M. C. SUNNY WONG
Keyword(s):  
Asymmetric Information ◽  
Diffusion Process ◽  
Adaptive Learning ◽  
Information Diffusion ◽  
Multiple Equilibria ◽  
Forecast Error ◽  
Mean Square ◽  
Cobweb Model ◽  
Boomerang Effect ◽  
Forecast Efficiency

This paper explores the equilibrium properties of boundedly rational heterogeneous agents under adaptive learning. In a modified cobweb model with a Stackelberg framework, there is an asymmetric information diffusion process from leading to following firms. It turns out that the conditions for at least one learnable equilibrium are similar to those under homogeneous expectations. However, the introduction of information diffusion leads to the possibility of multiple equilibria and can expand the parameter space of potential learnable equilibria. In addition, the inability to correctly interpret expectations will cause a “boomerang effect” on the forecasts and forecast efficiency of the leading firms. The leading firms' mean square forecast error can be larger than that of following firms if the proportion of following firms is sufficiently large.

scholarly journals Technological Revolutions and Stock Prices

2009 ◽  
Vol 99 (4) ◽  
pp. 1451-1483 ◽  
Author(s):  
Ľuboš Pástor ◽  
Pietro Veronesi
Keyword(s):  
United States ◽  
Equilibrium Model ◽  
Stock Prices ◽  
New Technology ◽  
Empirical Support ◽  
The United States ◽  
Internet Technologies ◽  
Ex Post ◽  
Ex Ante ◽  
High Uncertainty

We develop a general equilibrium model in which stock prices of innovative firms exhibit “bubbles” during technological revolutions. In the model, the average productivity of a new technology is uncertain and subject to learning. During technological revolutions, the nature of this uncertainty changes from idiosyncratic to systematic. The resulting bubbles in stock prices are observable ex post but unpredictable ex ante, and they are most pronounced for technologies characterized by high uncertainty and fast adoption. We find empirical support for the model's predictions in 1830–1861 and 1992–2005 when the railroad and Internet technologies spread in the United States. (JEL G12, L86, L92, N21, N22, N71, N72)

scholarly journals Platform Competition under Asymmetric Information

2013 ◽  
Vol 5 (3) ◽  
pp. 22-68 ◽  
Author(s):  
Hanna Hałaburda ◽  
Yaron Yehezkel
Keyword(s):  
Asymmetric Information ◽  
Market Failure ◽  
New Technology ◽  
Exclusive Dealing ◽  
Platform Competition ◽  
Ex Post ◽  
Market Inefficiency ◽  
The Difference ◽  
Two Sides ◽  
Do So

We consider platform competition in a two-sided market, where the two sides (buyers and sellers) have ex ante uncertainty and ex post asymmetric information concerning the value of a new technology. We find that platform competition may lead to a market failure: competition may result in a lower level of trade and lower welfare than a monopoly, if the difference in the degree of asymmetric information between the two sides is below a certain threshold. Multi-homing solves the market failure resulting from asymmetric information. However, if platforms can impose exclusive dealing, then they will do so, which results in market inefficiency. (JEL D41, D42, D82, D83, L11, L12)

ASYMMETRIC INFORMATION AND THE EXCESS VOLATILITY OF STOCK PRICES

1994 ◽  
Vol 32 (2) ◽  
pp. 228-235 ◽  
Author(s):  
Benjamin Eden ◽  
Boyan Jovanovic
Keyword(s):  
Asymmetric Information ◽  
Stock Prices ◽  
Excess Volatility

scholarly journals Stock Returns And Disagreement Among Sell-Side Analysts

2018 ◽  
Vol 34 (3) ◽  
pp. 487-496
Author(s):  
Jeffrey Hobbs ◽  
David L. Kaufman ◽  
Hei-Wai Lee ◽  
Vivek Singh
Keyword(s):  
Asymmetric Information ◽  
Stock Returns ◽  
Empirical Analysis ◽  
Stock Prices ◽  
Difference Of Opinion ◽  
Investor Optimism ◽  
The Difference ◽  
Opposing Effects

Asymmetric information, investor optimism, and unbiased prices hypotheses are the main hypotheses proposed for explaining how investors’ difference of opinion may impact stock returns. We use a new measure for divergence in investor beliefs among sell-side analysts to test these three hypotheses.  Our initial findings are not supportive of either the asymmetric information or the investor optimism hypotheses.  However, since these two hypotheses predict opposing effects of divergence in opinion on stock returns, the effects could neutralize their respective impacts on stock prices.  Our further empirical analysis though suggests that this is not the case.  The weight of the evidence presented suggests thatwithin the sell-side, the difference of opinion does not impose a bias on future stock returns.

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