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Annual Review of Financial Economics

Volume 12, 2020

The Information View of Financial Crises

Abstract

Short-term debt that can serve as a medium of exchange is designed to be information insensitive. No one should be tempted to acquire private information to gain an informational advantage in trading that could destabilize the value of the debt. Short-term debt minimizes the incentive to acquire information among all securities of equal value backed by the same underlying asset. Moreover, backing short-term debt with debt (i.e., using debt as collateral) minimizes information sensitivity across all types of collateral with equal value. These features are consistent with financial crises occurring periodically. In the information view adopted here, a financial crisis can occur when the collateral backing the short-term debt is thought to have lost enough value to raise doubts among the traders that some may acquire private information. In a crisis, there is a shift from information-insensitive to information-sensitive debt.

Keyword(s): financial crises, information insensitivity, JEL E32, JEL E51, safe debt
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2020-11-01
2025-06-14
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The Information View of Financial Crises
Annual Review of Financial Economics 12, 39 (2020); https://doi.org/10.1146/annurev-financial-110118-123041
/content/journals/10.1146/annurev-financial-110118-123041
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