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Guiso, L. (2010). A trust-driven financial crisis. Implications for the future of financial markets. EUI Working paper ECO2010/07

Luigi Guiso (European University Institute)

Abstract

The financial crisis has brought to light diffuse opportunistic behaviour and some serious frauds.Because of this trust towards banks, bankers, brokers and the stock market has collapsed to unprecedented levels and there are so far no signs of recovery. This paper uses survey-based information to document the collapse of trust, show its link to the emergence of frauds in the financial industry and discuss its consequences for the demand of financial instruments, investors portfolios and more generally investors reliance on financial markets. It argues that unless serious changes happen in the behaviour of the financial industry, the move towards safer portfolios and away from ambiguous securities that lack of trust entails, will have adverse effects on the availability and cost of equity financing. Accordingly a number of proposals to restore trust are discussed. Their common feature is to restore trust – a belief – by limiting the scope for opportunistic behaviour through a transfer of power from financial intermediaries to investors.

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Publisher info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2010/07.

Authors

Guiso, Luigi

Prof. Guiso joined the Institute in January 2007 from Università di Roma Tor Vergata. He has been visiting professor at the University of Chicago, Graduate School of Business. He is a Fellow of the Centre for Economic Policy Research, London and Director of the CEPR Finance Programme. He...

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