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Stress tests and information disclosure

Itay Goldstein and Yaron Leitner

Journal of Economic Theory, 2018, vol. 177, issue C, 34-69

Abstract: We study an optimal disclosure policy of a regulator that has information about banks (e.g., from conducting stress tests). In our model, disclosure can destroy risk-sharing opportunities for banks (the Hirshleifer effect). Yet, in some cases, some level of disclosure is necessary for risk sharing to occur. We provide conditions under which optimal disclosure takes a simple form (e.g., full disclosure, no disclosure, or a cutoff rule). We also show that, in some cases, optimal disclosure takes a more complicated form (e.g., multiple cutoffs or nonmonotone rules), which we characterize. We relate our results to the Bayesian persuasion literature.

Keywords: Bayesian persuasion; Optimal disclosure; Stress tests; Bank regulation; Adverse selection (search for similar items in EconPapers)
JEL-codes: D82 G01 G28 (search for similar items in EconPapers)
Date: 2018
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