Leveraged investor disclosures and concentrations of risk
نویسنده
چکیده
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. r 2009 Elsevier B.V. All rights reserved. JEL classification: G24; G28
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