Unraveling Credibility in Stress Test Result Disclosures

31 Pages Posted: 25 Aug 2023

Abstract

We model the credibility problems financial regulators often face in disclosing the stress test result. The regulator has motives to lie about the result. The motives come from the desire to guide agents' actions by influencing their beliefs. We show that the regulator can disclose some information credibly by making an imprecise announcement: revealing only the range (or, interval) in which the result lies. In the interest of credibility, the regulator needs to reveal information with less precision when the stress test result is either too good or too bad. As the result moves away from both extremes, information can be revealed credibly with more precision.

Keywords: Stress test, Disclosure of Stress test result, Credibility, Cheap talk

Suggested Citation

Parija, Arpit Kumar, Unraveling Credibility in Stress Test Result Disclosures. Available at SSRN: https://ssrn.com/abstract=4551926 or http://dx.doi.org/10.2139/ssrn.4551926

Arpit Kumar Parija (Contact Author)

IIM Calcutta ( email )

Kolkata
India

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