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Information asymmetry and risk transfer markets

Eric Stephens () and James Thompson ()

Journal of Financial Intermediation, 2017, vol. 32, issue C, 88-99

Abstract: We provide a tractable model of counterparty risk in a risk transfer market, and analyze the consequences of this risk being private information. We show that unknown type information can be revealed in the presence of a large trader identification policy; however, the market 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)
Date: 2017
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Working Paper: Information Asymmetry and Risk Transfer Markets (2016) Downloads
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Handle: RePEc:eee:jfinin:v:32:y:2017:i:c:p:88-99