IDEAS home Printed from https://ideas.repec.org/a/fip/fedreq/00050.html

Nonparametric Estimation of the Diamond-Dybvig Banking Model

Author

Listed:
  • Bruno Sultanum

Abstract

I propose a nonparametric structural estimator for the distribution of liquidity needs in a version of the Diamond and Dybvig (1983) model when only the aggregate level of withdrawals is observed. The model is an extension of Peck and Shell (2003) with a continuum of depositors. I show how the characterization of the optimal contract proposed in Sultanum (2014) can be used to estimate the distribution of aggregate liquidity needs. The method builds on the literature of estimation of auctions. More precisely, it uses the indirect approach proposed by Guerre et al. (2000). Guerre et al. (2000) use the differential equation associated with the first-order condition for the optimal bid to recover the unobserved distribution of agents' valuations from the distribution of bids in an auction. The method I propose uses the differential equation associated with the first-order condition for an optimal bank contract to recover the unobserved distribution of liquidity needs from the observed distribution of total bank withdrawals. I use a numerical simulation to illustrate the estimation procedure

Suggested Citation

  • Bruno Sultanum, 2016. "Nonparametric Estimation of the Diamond-Dybvig Banking Model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Q4, pages 261-279.
    • Handle: RePEc:fip:fedreq:00050
    as

    Download full text from publisher

    File URL: https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_quarterly/2016/q4/sultanum.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    3. Nathan Foley-Fisher & Borghan Narajabad & Stéphane Verani, 2020. "Self-Fulfilling Runs: Evidence from the US Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3520-3569.
    4. Jakub Kastl, 2011. "Discrete Bids and Empirical Inference in Divisible Good Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(3), pages 974-1014.
    5. Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 3-13.
    6. Nuno Cassola & Ali Hortaçsu & Jakub Kastl, 2013. "The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short‐Term Funds," Econometrica, Econometric Society, vol. 81(4), pages 1309-1345, July.
    7. Elena Krasnokutskaya, 2011. "Identification and Estimation of Auction Models with Unobserved Heterogeneity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 293-327.
    8. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Fall), pages 3-16.
    9. Sultanum, Bruno, 2014. "Optimal Diamond–Dybvig mechanism in large economies with aggregate uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 95-102.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sim, Khai Zhi, 2024. "Bank bailouts: Moral hazard and commitment," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    2. Gu, Chao & Monnet, Cyril & Nosal, Ed & Wright, Randall, 2023. "Diamond–Dybvig and beyond: On the instability of banking," European Economic Review, Elsevier, vol. 154(C).
    3. Ennis, Huberto M. & Keister, Todd, 2010. "Banking panics and policy responses," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 404-419, May.
    4. Todd Keister & Vijay Narasiman, 2016. "Expectations vs. Fundamentals- driven Bank Runs: When Should Bailouts be Permitted?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 89-104, July.
    5. Gao, Jiahong & Reed, Robert R., 2024. "Increasing returns to scale and financial fragility," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    6. Li, Yang, 2017. "Interest rates and financial fragility," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 195-205.
    7. Huberto Ennis & Todd Keister, 2016. "Optimal banking contracts and financial fragility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 335-363, February.
    8. Gao, Jiahong & Reed, Robert R., 2021. "Sunspot bank runs and fragility: The role of financial sector competition," European Economic Review, Elsevier, vol. 139(C).
    9. Mitkov, Yuliyan, 2020. "Inequality and financial fragility," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 233-248.
    10. Keister, Todd & Mitkov, Yuliyan, 2023. "Allocating losses: Bail-ins, bailouts and bank regulation," Journal of Economic Theory, Elsevier, vol. 210(C).
    11. Sultanum, Bruno, 2018. "Financial fragility and over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 177(C), pages 616-658.
    12. Panetti, Ettore, 2022. "Banks’ liquidity provision and panic runs with recursive preferences," Finance Research Letters, Elsevier, vol. 47(PA).
    13. 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.
    14. Todd Keister & Huberto M. Ennis, 2008. "Run Equilibria in a Model of Financial Intermediation," 2008 Meeting Papers 513, Society for Economic Dynamics.
    15. Voellmy, Lukas, 2024. "Preventing runs under sequential revelation of liquidity needs," Journal of Economic Dynamics and Control, Elsevier, vol. 158(C).
    16. Ryuichiro Izumi, 2021. "Opacity: Insurance and Fragility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 146-169, April.
    17. Xuesong Huang & Todd Keister, 2025. "Can Redemption Fees Prevent Runs on Funds?," Staff Reports 1160, Federal Reserve Bank of New York.
    18. Guilherme Carmona, 2004. "On the Existence of Equilibrium Bank Runs in a Diamond-Dybvig Environment," Finance 0404009, University Library of Munich, Germany.
    19. Gu, Chao, 2011. "Herding and bank runs," Journal of Economic Theory, Elsevier, vol. 146(1), pages 163-188, January.
    20. Shakina, Ekaterina & Angerer, Martin, 2018. "Coordination and communication during bank runs," Journal of Behavioral and Experimental Finance, Elsevier, vol. 20(C), pages 115-130.

    More about this item

    Keywords

    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedreq:00050. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Pascasio (email available below). General contact details of provider: https://edirc.repec.org/data/frbrius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.