Liquidity and Ambiguity: Banks or Asset Markets?
AbstractWe study the impact of ambiguity on two alternative institutions of financial intermediation in an economy where consumers face uncertain liquidity needs. The ambiguity the consumers experience is modeled by the degree of confidence in their additive beliefs. We analyze the optimal liquidity allocation and two institutional settings for implementing this allocation: a secondary asset market and a bank deposit contract. For full confidence we obtain the well-known result that consumers prefer the bank deposit contract 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.
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Bibliographic InfoPaper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0444.
Length: 39 pages
Date of creation: Jun 2007
Date of revision: Jun 2007
Financial institutions; Liquidity; Ambiguity; Choquet Expected Utility.;
Other versions of this item:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G1 - Financial Economics - - General Financial Markets
- G2 - Financial Economics - - Financial Institutions and Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-30 (All new papers)
- NEP-BAN-2007-06-30 (Banking)
- NEP-UPT-2007-06-30 (Utility Models & Prospect Theory)
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