Stress Tests and Information Disclosure

57 Pages Posted: 7 Sep 2017

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Yaron Leitner

Washington University in St. Louis

Date Written: 2017-08-22

Abstract

We study an optimal disclosure policy of a regulator that has information about banks (e.g., from conducting stress tests). In our model, disclosure can destroy risk-sharing opportunities for banks (the Hirshleifer effect). Yet, in some cases, some level of disclosure is necessary for risk sharing to occur. We provide conditions under which optimal disclosure takes a simple form (e.g., full disclosure, no disclosure, or a cutoff rule). We also show that, in some cases, optimal disclosure takes a more complicated form (e.g., multiple cutoffs or nonmonotone rules), which we characterize. We relate our results to the Bayesian persuasion literature.

Keywords: Bayesian persuasion, optimal disclosure, stress tests, bank regulation, adverse selection

Suggested Citation

Goldstein, Itay and Leitner, Yaron, Stress Tests and Information Disclosure (2017-08-22). Journal of Economic Theory, Volume 177, September 2018, Pages 34–69; FRB of Philadelphia Working Paper No. 17-28. Available at SSRN: https://ssrn.com/abstract=3029761

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Yaron Leitner

Washington University in St. Louis

MO
United States

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