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Working Paper
Stress tests and information disclosure
Supersedes Working Paper 13-26 . We study an optimal disclosure policy of a regulator that has information about banks? ability to overcome future liquidity shocks. We focus on the following tradeoff: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (the Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We relate our results to the Bayesian persuasion ...