Information Asymmetry and Risk Transfer Markets

27 Pages Posted: 3 Nov 2013 Last revised: 23 Mar 2016

See all articles by Eric Stephens

Eric Stephens

University of Alberta

James R. Thompson

University of Waterloo - School of Accounting and Finance

Date Written: February 1, 2016

Abstract

We provide a tractable model of counterparty risk in an intermediated risk transfer market, and analyze the consequences of this risk being private information. We show that unknown type information can be revealed when large trades are observable; however, the 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

Suggested Citation

Stephens, Eric and Thompson, James R., Information Asymmetry and Risk Transfer Markets (February 1, 2016). Available at SSRN: https://ssrn.com/abstract=2348862 or http://dx.doi.org/10.2139/ssrn.2348862

Eric Stephens

University of Alberta ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

James R. Thompson (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

HOME PAGE: http://arts.uwaterloo.ca/~james

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