We provide a tractable model of counterparty risk in an intermediated risk transfer market, and analyze the consequences of this risk being private information. We show that unknown type information can be revealed when large trades are observable; however, the allocation is shown to be constrained inefficient. The inefficiency is highlighted by considering the imposition of a transaction tax, which can improve welfare by encouraging more information revelation and increasing risk transfer. The results suggest that increased transparency and/or central counterparty arrangements in over-the-counter derivative markets may promote transparency of counterparty risk.

Additional Metadata
Keywords Risk Transfer Markets, Asymmetric Information, Counterparty Risk, Regulation
Publisher Department of Economics
Series Carleton Economic Papers
Citation
Stephens, E, & J.R. Thompson (James R.). (2016). Information Asymmetry and Risk Transfer Markets (No. CEP 16-04). Carleton Economic Papers. Department of Economics.