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Financial intermediation in the theory of the risk-free rate

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  • Marini, François
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    Abstract

    This paper constructs a general equilibrium model of the interaction between financial intermediaries and financial markets that sheds some light on the short-term volatility of real interest rates. The main findings of the paper are as follows. When financial intermediaries issue contingent (non-contingent) liabilities, an increase in the consumers' relative risk aversion coefficient decreases (increases) the interest rate. Also, the interest rate rises when capitalists are less risk-averse and financial intermediaries are hit by a liquidity shock.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 7 (July)
    Pages: 1663-1668

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:7:p:1663-1668

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Financial intermediation Financial markets Liquidity preference Risk aversion Risk-free rate Risk sharing;

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    1. Coudert, V. & Gex, M., 2006. "Can risk aversion indicators anticipate financial crises?," Financial Stability Review, Banque de France, Banque de France, issue 9, pages 67-87, December.
    2. Prasanna Gai & Nicholas Vause, 2006. "Measuring Investors' Risk Appetite," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
    3. John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1696, Cowles Foundation for Research in Economics, Yale University.
    4. Weinbaum, David, 2010. "Preference heterogeneity and asset prices: An exact solution," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(9), pages 2238-2246, September.
    5. Franklin Allen & Douglas Gale, 2005. "From Cash-in-the-Market Pricing to Financial Fragility," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 535-546, 04/05.
    6. Douglas W. Diamond, . "Liquidity, Banks and Markets," CRSP working papers 326, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    7. Cardak, Buly A. & Wilkins, Roger, 2009. "The determinants of household risky asset holdings: Australian evidence on background risk and other factors," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(5), pages 850-860, May.
    8. Virginie Coudert & Mathieu Gex, 2007. "Does Risk Aversion Drive Financial Crises? Testing the Predictive Power of Empirical Indicators," Working Papers 2007-02, CEPII research center.
    9. Franklin Allen, 2001. "Do Financial Institutions Matter?," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 01-04, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. Franklin Allen & Douglas Gale, 2004. "Financial Intermediaries and Markets," Econometrica, Econometric Society, Econometric Society, vol. 72(4), pages 1023-1061, 07.
    11. Griffiths, Mark D. & Lindley, James T. & Winters, Drew B., 2010. "Market-making costs in Treasury bills: A benchmark for the cost of liquidity," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(9), pages 2146-2157, September.
    12. Ding, Bill & Shawky, Hany A. & Tian, Jianbo, 2009. "Liquidity shocks, size and the relative performance of hedge fund strategies," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(5), pages 883-891, May.
    13. Loretta J. Mester, 2007. "Some thoughts on the evolution of the banking system and the process of financial intermediation," Economic Review, Federal Reserve Bank of Atlanta, issue Q1-2, pages 67 - 75.
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