Government insurance, information, and asset prices

An investment decision problem is studied, in a framework where the government offers insurance against the possibility of the price of a risky asset falling drastically. The problem is considered under different informational scenarios, i.e., information quality, under which agents have to infer th...

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Bibliographic Details
Published inInternational review of economics & finance Vol. 37; pp. 165 - 183
Main Author Lopomo Beteto Wegner, Danilo
Format Journal Article
LanguageEnglish
Published Greenwich Elsevier Inc 01.05.2015
Elsevier Science Ltd
Subjects
Asset prices
Government insurance
Information
Information quality
Prices
Public policy
Studies
Volatility
Asset prices
G01
Government insurance
E44
Information quality
E32
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Summary:An investment decision problem is studied, in a framework where the government offers insurance against the possibility of the price of a risky asset falling drastically. The problem is considered under different informational scenarios, i.e., information quality, under which agents have to infer the state of fundamentals of the economy. Changes in information quality is shown to affect equilibrium prices despite no concomitant changes in the fundamentals, creating excess volatility. The possibility of government intervention is shown to increase equilibrium prices, which can be ordered as a function of information quality. Empirical evidence supporting the model is presented. •This paper studies the impact of information quality and government policy on prices.•Information quality is shown to affect prices and cause excess volatility.•The possibility of government intervention during crises leads to an increase in prices.•Price indices' data from large, mid and small capitalization firms support the model.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2014.11.021