Information Production during the Euro Crisis
with Silvia Iorgova, September 2020
Outside of financial crises, investors have little incentive to produce private information on banks’ short-term liabilities held as information-insensitive safe assets. The same does not hold during crises. We measure daily information production using credit default swap spreads during the global financial crisis and the subsequent European debt crisis. We study abnormal information production around major events and interventions during these crises and find that, on average, capital injections reduced abnormal information production while early European stress tests increased it. We also link information production to outcomes: high levels of information production predict bank balance sheet contraction and higher government expenditures to support financial institutions. In an addendum, we show information production on non-financials dramatically increased relative to financials at the height of the COVID-19 crisis, reflecting the non-financial nature of the initial shock.