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After reading a recent article and a discussion with a friend, I was left wondering what an investment bank would have to gain by claiming that a financial crisis is coming.

I can see an obvious answer which is that by instilling fear in the market you can lower stock prices of shares that you would be interested in buying. However I find that this is a very dangerous game to play, because if the panic spreads, overall their portfolio would lose a lot.

Whether their prediction is accurate or realistic doesn't concern me. I just want to know what they'd gain if they did lie about it.

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  • $\begingroup$ I'm sorry if this question is out of the scope of this SE, I'm not exactly sure what other website would have been appropriate. $\endgroup$ – VoidOutput Sep 22 '18 at 16:58
  • $\begingroup$ I think it's a fair question! Though to clarify- are you specifically asking what a hedge fund might have to gain by lying about an oncoming crisis, or what they might have to gain by predicting a crisis, even if it's an honest assessment? $\endgroup$ – AndrewC Sep 22 '18 at 18:24
  • $\begingroup$ My question was about the former (gains when lying) but I think an answer that addresses both perspectives could be very informative. $\endgroup$ – VoidOutput Sep 22 '18 at 19:04
  • $\begingroup$ I believe you may overestimate the effect of one investment bank's warnings. My impression is that it would have no effect on the market and so there is nothing to gain or lose. $\endgroup$ – BB King Sep 23 '18 at 20:56
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What would an investment bank have to gain by warning of an impending financial crisis?

An entity might have an incentive to deceitfully alarm about an "impending crisis" if the entity's portfolio largely consist of positions which lead to profit when the price of other asset(s) goes down. Examples of such positions are put options, short selling of stocks, and certain side in interest rate swaps. The same applies if much of the entity's liabilities is positively correlated with the price of assets which are representative of the market.

The entity could hedge against the risk of a generalized fall by getting long positions in "very" Out-of-The-Money put options. Being far OTM implies that this protection for drastic scenarios is not significantly expensive.

Likewise, the rest of an entity's portfolio could also consist of assets deemed stable enough to withstand crises.

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