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Government insurance, information, and asset prices

Danilo Lopomo Beteto Wegner ()

International Review of Economics & Finance, 2015, vol. 37, issue C, 165-183

Abstract: An investment decision problem is studied, in a framework where the government offers insurance against the possibility of the price of a risky asset falling drastically. The problem is considered under different informational scenarios, i.e., information quality, under which agents have to infer the state of fundamentals of the economy. Changes in information quality is shown to affect equilibrium prices despite no concomitant changes in the fundamentals, creating excess volatility. The possibility of government intervention is shown to increase equilibrium prices, which can be ordered as a function of information quality. Empirical evidence supporting the model is presented.

Keywords: Government insurance; Information quality; Asset prices (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.iref.2014.11.021

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