Bayesian Persuasion By Stress Test Disclosure

Wolfgang Gick and Thilo Pausch (thilo.pausch@bundesbank.de)

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: This paper argues that stress tests encompassing the entire banking sector (macro stress tests) can be designed to improve welfare. We develop a multi-receiver framework of Bayesian persuasion to show that a banking supervisor can create value when he commits to disclose the stress-testing methodology (signal-generating process) together with the stress test result (signal). By optimally choosing the two signals, supervisors can deliver superior information that will deliver a higher expected utility to prudent investors when acting accordingly. The paper uses an equilibrium construction with a continuum of receivers. We find that banking supervisors create welfare as optimal disclosure reduces uncertainty and leads to better risk-adjusted behavior on the investors' side and to less financial market volatility.

JEL-codes: D81 D84 G28 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/79913/1/VfS_2013_pid_599.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79913

Access Statistics for this paper

More papers in VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics (econstor@zbw-workspace.eu).