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Liquidity uncertainty and intermediation

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  • Lazopoulos, Ioannis

Abstract

The 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.

Suggested Citation

  • Lazopoulos, Ioannis, 2013. "Liquidity uncertainty and intermediation," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 403-414.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:403-414
    DOI: 10.1016/j.jbankfin.2012.09.026
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    References listed on IDEAS

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    Cited by:

    1. Simas Kucinskas, 2015. "Aggregate Risk and Efficiency of Mutual Funds," Tinbergen Institute Discussion Papers 15-113/VI, Tinbergen Institute.

    More about this item

    Keywords

    Financial intermediation; Liquidity uncertainty; Deposit contract; Equity contract;

    JEL classification:

    • 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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