Liquidity uncertainty and intermediation
AbstractThe paper performs a welfare comparison between demand deposit and equity contracts in the presence of intrinsic aggregate uncertainty. In this framework, the welfare dominance of deposit contracts emerges under corner preferences. It is shown that aggregate uncertainty creates high price volatility of ex-dividend equity claims traded in a secondary market and the resulting consumption allocations offer less risk-sharing opportunities to risk-averse consumers than tailor-made deposit contracts. The contingency of early payoffs on depositors’ withdrawal order reinforces the welfare performance of deposit contracts, whereas costly liquidation of productive long-term investments deteriorates their welfare performance relative to equity contracts.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 37 (2013)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf
Financial intermediation; Liquidity uncertainty; Deposit contract; Equity contract;
Other versions of this item:
- Ioannis Lazopoulos, 2010. "Optimal Intermediation Under Aggregate Consumption Uncertainty," School of Economics Discussion Papers 0710, School of Economics, University of Surrey.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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