Working Paper

Stress tests and information disclosure

Abstract: Supersedes Working Paper 13-26 . We study an optimal disclosure policy of a regulator that has information about banks? ability to overcome future liquidity shocks. We focus on the following tradeoff: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (the Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We relate our results to the Bayesian persuasion literature and to the debate on disclosure of stress test results.

Keywords: Bayesian persuasion; Optimal disclosure; Stress tests;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2015-11-16

Number: 15-10

Pages: 57 pages

Note: Superseded by WP 17-28