Asset Holdings, Information Aggregation in Secondary Markets and Credit Cycles

Henrique Basso

No 2214, Working Papers from Banco de España

Abstract: Imperfect information aggregation in secondary credit markets has significant consequences for economic cycles. As banks put more weight on mark-to-market gains, they find it optimal to refrain from revealing information about adverse shocks. Consequently, default risk is mispriced, and loan volumes, and thus investment, are not appropriately reduced. Overinvestment lowers the price of capital, leading households to increase consumption without decreasing labour supply, generating a boom. Due to mispricing, banks subsequently face bigger losses and capital depletion. Output then decreases sharply due to credit supply shortages. In a model calibrated to the US economy, these instances of market dysfunction are crucial in amplifying credit cycles.

Keywords: information revelation; credit markets; mark-to-market; mispricing; bank compensation (search for similar items in EconPapers)
JEL-codes: E32 E50 G01 G14 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2022-03
New Economics Papers: this item is included in nep-dge and nep-fdg
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Journal Article: Asset holdings, information aggregation in secondary markets and credit cycles (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2214

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