A model of a systemic bank run
This paper provides a model of the view that the 2008 financial crisis is reminiscent of a bank run, focussing on six stylized key features. In particular, core financial institutions have invested their funds in asset-backed securities rather than committed to long-term projects: in distress, these can potentially be sold to a large pool of outside investors at steep discounts. I consider two different motives for outside investors and their interaction with banks trading asset-backed securities: uncertainty aversion versus adverse selection. I shall argue that the version with uncertainty averse investors is more consistent with the stylized facts than the adverse selection perspective: in the former, the crisis deepens, the larger the market share of distressed core banks, while a run becomes less likely instead as a result in the adverse selection version. Therefore, the outright purchase of troubled assets by the government at prices above current market prices may both alleviate the financial crises as well as provide tax payers with returns above those for safe securities.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nicholas Barberis & Ming Huang & Tano Santos, 2001.
"Prospect Theory And Asset Prices,"
The Quarterly Journal of Economics,
MIT Press, vol. 116(1), pages 1-53, February.
- Nicholas Barberis & Ming Huang & Tano Santos, 1999. "Prospect Theory and Asset Prices," NBER Working Papers 7220, National Bureau of Economic Research, Inc.
- Nicholas BARBERIS & Ming HUANG & Tano SANTOS, 2000. "Prospect Theory and Asset Prices," FAME Research Paper Series rp16, International Center for Financial Asset Management and Engineering.
- Nicholas Barberis & Ming Huang & Tano Santos, . "Prospect Theory and Asset Prices," CRSP working papers 494, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Allen, Franklin & Carletti, Elena, 2006.
"Credit risk transfer and contagion,"
Journal of Monetary Economics,
Elsevier, vol. 53(1), pages 89-111, January.
- Schmeidler, David, 1989.
"Subjective Probability and Expected Utility without Additivity,"
Econometric Society, vol. 57(3), pages 571-87, May.
- David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2007.
"Collective Risk Management in a Flight to Quality Episode,"
NBER Working Papers
12896, National Bureau of Economic Research, Inc.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, vol. 63(5), pages 2195-2230, October.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Franklin Allen & Douglas Gale, 1976.
"Optimal Financial Crises,"
Center for Financial Institutions Working Papers
97-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Franklin Allen & Douglas Gale, 2003.
"Financial Intermediaries and Markets,"
Center for Financial Institutions Working Papers
00-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Edward J. Green, 1995.
"Implementing Efficient Allocations in a Model of Financial Intermediation,"
- Green, Edward J. & Lin, Ping, 2003. "Implementing efficient allocations in a model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 109(1), pages 1-23, March.
- Edward J. Green & Ping Lin, 1996. "Implementing efficient allocations in a model of financial intermediation," Working Papers 576, Federal Reserve Bank of Minneapolis.
- Gale, D. & Allen, F., 1991.
"Limited Market Participation and Volatility of Asset Prices,"
Weiss Center Working Papers
14-91, Wharton School - Weiss Center for International Financial Research.
- Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-55, September.
- Allen, F. & Gale, D., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 2-92, Wharton School - Weiss Center for International Financial Research.
- Huberto M. Ennis & Todd Keister, 2009.
"Bank Runs and Institutions: The Perils of Intervention,"
American Economic Review,
American Economic Association, vol. 99(4), pages 1588-1607, September.
- Huberto M. Ennis & Todd Keister, 2007. "Bank runs and institutions : the perils of intervention," Working Paper 07-02, Federal Reserve Bank of Richmond.
- Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
- Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
- Ennis, Huberto M. & Keister, Todd, 2009. "Run equilibria in the Green-Lin model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1996-2020, September.
- Douglas W. Diamond & Raghuram G. Rajan, 2003.
"Liquidity Shortages and Banking Crises,"
NBER Working Papers
10071, National Bureau of Economic Research, Inc.
- Douglas W. Diamond & Raghuram G. Rajan, 2009.
"Fear of Fire Sales and the Credit Freeze,"
NBER Working Papers
14925, National Bureau of Economic Research, Inc.
- Andrea L. Eisfeldt, 2004. "Endogenous Liquidity in Asset Markets," Journal of Finance, American Finance Association, vol. 59(1), pages 1-30, 02.
- Smith, Bruce D, 1991. "Bank Panics, Suspensions, and Geography: Some Notes on the "Contagion of Fear" in Banking," Economic Inquiry, Western Economic Association International, vol. 29(2), pages 230-48, April.
- Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005.
"Liquidity Risk and Contagion,"
Journal of the European Economic Association,
MIT Press, vol. 3(2-3), pages 556-566, 04/05.
- Todd Keister & Huberto M. Ennis, 2008.
"Run Equilibria in a Model of Financial Intermediation,"
2008 Meeting Papers
513, Society for Economic Dynamics.
- Huberto M. Ennis & Todd Keister, 2008. "Run equilibria in a model of financial intermediation," Staff Reports 312, Federal Reserve Bank of New York.
- Thomas J. Sargent & Riccardo Colacito & Lars P. Hansen & Timothy Cogley, 2008. "Robustness and US Monetary," 2008 Meeting Papers 228, Society for Economic Dynamics.
- Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
- Timothy Cogley & Riccardo Colacito & Lars Peter Hansen & Thomas J. Sargent, 2008. "Robustness and U.S. Monetary Policy Experimentation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1599-1623, December.
- Epstein, Larry G, 1999. "A Definition of Uncertainty Aversion," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 579-608, July.
When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:57:y:2010:i:1:p:78-96. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.