The Macroprudential Role of Stock Markets

44 Pages Posted: 12 May 2020

See all articles by Kyriakos Chousakos

Kyriakos Chousakos

Bank of America

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 27, 2020

Abstract

A financial crisis is an event of sudden information acquisition about the collateral backing short-term debt in credit markets. When investors see a financial crisis coming, however, they react by more intensively acquiring information about firms in stock markets, revealing those that are weaker, which as a consequence end up cut off from credit. This cleansing effect of stock markets’ information on credit markets’ composition discourage information acquisition about the collateral of the firms remaining in credit markets, slowing down credit growth and potentially preventing a crisis. Production of information in stock markets, then, acts as a macro-prudential tool in the economy.

Keywords: Business Cycles, Financial Markets and the Macro-economy, Financial Crises

JEL Classification: E3, E32, E44, G01

Suggested Citation

Chousakos, Kyriakos and Gorton, Gary B. and Ordoñez, Guillermo, The Macroprudential Role of Stock Markets (April 27, 2020). Available at SSRN: https://ssrn.com/abstract=3586560 or http://dx.doi.org/10.2139/ssrn.3586560

Kyriakos Chousakos

Bank of America

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Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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