The Macroprudential Role of Stock Markets

45 Pages Posted: 12 May 2020 Last revised: 31 Jan 2021

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: May 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 macroprudential tool in the economy.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Chousakos, Kyriakos and Gorton, Gary B. and Ordoñez, Guillermo, The Macroprudential Role of Stock Markets (May 2020). NBER Working Paper No. w27113, Available at SSRN: https://ssrn.com/abstract=3597845

Gary B. Gorton

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3
Abstract Views
351
PlumX Metrics