Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
960920 | Journal of Financial Markets | 2009 | 23 Pages |
Abstract
We analyze a model where investors (e.g., hedge funds) need to borrow from lenders with heterogeneous risk-exposures and risk-management motives. Investors may obtain advantageous terms of borrowing by disclosing their investment strategy, thereby revealing its correlation to the lender's existing risk exposure. Investors risk being “front-run” by their lender if they disclose, however. We show that in the presence of front-running, the “unraveling” result of full disclosure may not hold. In addition, disclosure regulation results in a loss of welfare since investors compelled to disclose will mitigate front-running by choosing a lender with sufficiently high correlation, thus exacerbating concentrations of risk.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
K. Jeremy Ko,