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Federal Reserve Bank of New York
Staff Reports
Information acquisition and financial intermediation
Nina Boyarchenko
Abstract

Informational advantages of specialists relative to households lead to disagreement between the two in an intermediated market. Although households can acquire additional signals to reduce the informational asymmetry, the additional information is costly, making it rational for households to limit the accuracy of the signals they observe. I show that this leads the equity capital constraint to bind more frequently, making the asset prices in the economy more volatile unconditionally. When disagreement between households and specialists is high, however, return volatility decreases. I find empirical evidence consistent with these predictions.


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Nina Boyarchenko, Information acquisition and financial intermediation, Federal Reserve Bank of New York, Staff Reports 571, 2012, revised 01 Jun 2014.
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Keywords: financial intermediation; rational inattention; disagreement
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