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Asset price risk, banks and markets

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  • Zhang, Yu

Abstract

This paper examines the role of Diamond-Dybvig banks when financial markets exist. Previous studies have shown that banks are redundant when financial markets are available. This paper shows that is not true when the asset price risk is considered. Asset price risk makes the liquidation value of the assets uncertain. Therefore holding the asset directly is risky for the consumers who are subject to liquidity shocks. Banks can provide a deterministic return to the depositors since the aggregate withdrawal is predictable and therefore the banks do not have to liquidate the asset in the market.

Suggested Citation

  • Zhang, Yu, 2017. "Asset price risk, banks and markets," Finance Research Letters, Elsevier, vol. 21(C), pages 21-25.
  • Handle: RePEc:eee:finlet:v:21:y:2017:i:c:p:21-25
    DOI: 10.1016/j.frl.2016.11.015
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    References listed on IDEAS

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    1. Haubrich, Joseph G. & King, Robert G., 1990. "Banking and insurance," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 361-386, December.
    2. Antinolfi, Gaetano & Prasad, Suraj, 2008. "Commitment, banks and markets," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 265-277, March.
    3. Hellwig, Martin, 1994. "Liquidity provision, banking, and the allocation of interest rate risk," European Economic Review, Elsevier, vol. 38(7), pages 1363-1389, August.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Diamond-Dybvig banks; Financial markets; Liquidity; Asset price risk;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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