Self-Destroying Prophecies ? The Endogeneity Pitfall in Using Market Signals as Triggers for Prompt Corrective Action

@inproceedings{Birchler2007SelfDestroyingP,
  title={Self-Destroying Prophecies ? The Endogeneity Pitfall in Using Market Signals as Triggers for Prompt Corrective Action},
  author={Urs W. Birchler and Matteo L Facchinetti},
  year={2007}
}
In recent years, authorities from bank supervisors to firm managers or even terrorism fighters have shown increasing interest in the extraction of information from market prices. We argue that the use of market data as guides to action leads to a “double endogeneity problem”. Using a private information/action game between an authority and market participants we show that the intended use of market prices for the purpose of prevention may destroy their very information content. We also show… CONTINUE READING

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