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Biased Decision-Making and Liquidity Buffer in Commercial Banking

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  • Mingyuan Sun

Abstract

Few derived versions based on the classic bank run model have taken into account the framing effect of general lenders. The purpose of this study is to revisit the issue and discuss a model of bank run equilibrium combined with biased risk preference, which is applied to analyze how portfolio allocation and liquidity buffer in commercial banks are affected by liquidation cost and the reference point. The results suggest the condition on which the liquidity buffer of a particular bank should provide. Liquidation cost is positively correlated with the lower bound of liquidity buffer. The effect of the reference point on liquidity buffer partially depends on the slope of yield curve term structure. Higher reference point could typically cause a lower portion of long-term investment.

Suggested Citation

  • Mingyuan Sun, 2018. "Biased Decision-Making and Liquidity Buffer in Commercial Banking," Applied Economics and Finance, Redfame publishing, vol. 5(2), pages 84-94, March.
    • Handle: RePEc:rfa:aefjnl:v:5:y:2018:i:2:p:84-94
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    More about this item

    Keywords

    liquidity; reference point; liquidation; lower bound; bank run;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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