Systematic Information Manipulation by Financial Intermediary

We study real e ects of intermediation in a dual nancial system that features coexistence of an open exchange and OTC bilateral market. Both markets trade futures on commodity, but volumes traded on bilateral market are hidden. That friction obstructs learning, as in order to correctly predict future spot price, uninformed traders have to infer realized productivity shock only from a fraction of total hedging demand. Financial intermediary may strategically shape producers choice of trading venue and impose a non-revealing equilibrium that features i) non-revelation of realization of aggregate productivity shock; ii) feedback e ect from nancial sector to real sector; iii) ine cient production decisions; iv) higher spot price volatility. We study welfare implications of nancial intermediation. ∗Northwestern University, Department of Economics. 2001 Sheridan Road, Evanston, IL 60208 (e-mail: [email protected]). I thank for their comments Ana Babus, David Berger, Lawrence Christiano, Matthias Doepke, Martin Eichenbaum, Guido Lorenzoni, Giorgio Primiceri, Sergei Seleznev, and seminar participants at the Northwestern Macro Lunch. Comments are welcome, errors are mine.