Information Asymmetry and Risk Transfer Markets

Eric Stephens and James Thompson ()

No 16-04, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: We provide a tractable model of counterparty risk in an intermediated risk transfer market, and analyze the consequences of this risk being private information. We show that unknown type information can be revealed when large trades are observable; however, the allocation is shown to be constrained inefficient. The inefficiency is highlighted by considering the imposition of a transaction tax, which can improve welfare by encouraging more information revelation and increasing risk transfer. The results suggest that increased transparency and/or central counterparty arrangements in over-the-counter derivative markets may promote transparency of counterparty risk.

Keywords: Risk Transfer Markets; Asymmetric Information; Counterparty Risk; Regulation (search for similar items in EconPapers)
Pages: 33 pages
Date: 2016-03-17
New Economics Papers: this item is included in nep-mic
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Published: Carleton Economic Papers

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Journal Article: Information asymmetry and risk transfer markets (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:car:carecp:16-04

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