Skip to main content
Article thumbnail
Location of Repository

Financial innovation and risk: the role of information

By Roberto Piazza


Financial innovation has increased opportunities for diversification and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies compared with passive (less informed) strategies. What are the consequences? I have studied an economy with linear production technologies, some more risky than others. Investors can use low quality public information or collect high quality, but costly, private information. Information helps in avoiding excessively risky investments. Financial innovation lowers the incentives for private information collection and causes a deterioration in public information: the economy more often invests in excessively risky technologies. This changes the properties of the business cycle and can reduce welfare by increasing the likelihood of “liquidation crises".Financial innovation, information collection, great moderation, liquidation crisis

OAI identifier:

Suggested articles

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.