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Leveraged investor disclosures and concentrations of risk

K. Jeremy Ko

Journal of Financial Markets, 2009, vol. 12, issue 3, 368-390

Abstract: We analyze a model where investors (e.g., hedge funds) need to borrow from lenders with heterogeneous risk-exposures and risk-management motives. Investors may obtain advantageous terms of borrowing by disclosing their investment strategy, thereby revealing its correlation to the lender's existing risk exposure. Investors risk being "front-run" by their lender if they disclose, however. We show that in the presence of front-running, the "unraveling" result of full disclosure may not hold. In addition, disclosure regulation results in a loss of welfare since investors compelled to disclose will mitigate front-running by choosing a lender with sufficiently high correlation, thus exacerbating concentrations of risk.

Keywords: Hedge; funds; Disclosure; Risk; management; Front-running; Systemic; risk (search for similar items in EconPapers)
Date: 2009
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