Persuasion by Stress Testing

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  • Persuasion by Stress Testing Book Detail

  • Author : Wolfgang Gick
  • Release Date : 2016
  • Publisher :
  • Genre :
  • Pages : 48
  • ISBN 13 :
  • File Size : 39,39 MB

Persuasion by Stress Testing by Wolfgang Gick PDF Summary

Book Description: The game-theoretical analysis of this paper shows that stress tests that cover the entire banking sector (macro stress tests) can be performed by institutional supervisors to improve welfare. In a multi-receiver framework of Bayesian persuasion we show that a banking authority can create value when committing to disclose the stress-testing methodology (signal-generating process) together with the stress test result (signal). Disclosing two pieces of information is a typical procedure used in stress tests. By optimally choosing these two signals, supervisors can deliver superior information to prudent investors and enhance welfare. The paper offers a new theory to explain why stress tests are generally welfare enhancing. We also offer a treatment of the borderline case where the banking sector is hit by a crisis, in which case the supervisor will optimally disclose an uninformative signal.

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