Liquidity and ambiguity: banks or asset markets?

Eichberger, Jürgen and Spanjers, Willy (2009) Liquidity and ambiguity: banks or asset markets? In: Liquidity and Trust in Incomplete Markets; 23-24 Nov 2009, Freiburg i.B., Germany.

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Abstract

This paper studies the impact of incalculable risk (i.e. ambiguity) on two alternative institutional arrangements for financial intermediation in an economy where consumers face uncertain liquidity needs. The ambiguity the consumers experience is modeled by their degree of confidence in their additive beliefs. The optimal liquidity allocation and two institutional arrangements for implementing this allocation are analyzed: a secondary asset market and a competitive banking sector. For full confidence we obtain the well-known result that consumers prefer the deposit contract offered in the competitive banking sector over the asset market, since the former can provide the optimal cross subsidy for consumers with high liquidity needs. With increasing ambiguity this preference will be reversed: the asset market is preferred, since it avoids inefficient liquidation if the bank reserve holdings turn out to be suboptimal.

Item Type: Conference or Workshop Item (Paper)
Event Title: Liquidity and Trust in Incomplete Markets
Organising Body: Freiburg Institute of Advanced Studies (FRIAS)
Uncontrolled Keywords: financial institutions, Choquet expected utility
Research Area: Accounting and finance
Economics and econometrics
Faculty, School or Research Centre: Faculty of Arts and Social Sciences > School of Economics (until November 2012)
Related URLs:
Depositing User: Willem Spanjers
Date Deposited: 15 Oct 2012 14:17
Last Modified: 15 Oct 2012 14:17
URI: http://eprints.kingston.ac.uk/id/eprint/21880

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