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Liquidity and Ambiguity: Banks or Asset Markets?

Author

Listed:
  • Jürgen Eichberger

    () (University of Heidelberg, Department of Economics)

  • Willy Spanjers

    () (Kingston University, School of Economics)

Abstract

We study the impact of ambiguity on two alternative institutions of financial intermediation in an economy where consumers face uncertain liquidity needs. The ambiguity the consumers experience is modeled by the degree of confidence in their additive beliefs. We analyze the optimal liquidity allocation and two institutional settings for implementing this allocation: a secondary asset market and a bank deposit contract. For full confidence we obtain the well-known result that consumers prefer the bank deposit contract over the asset market, since the former can provide the optimal cross subsidy for consumers with high liquidity needs. With increasing ambiguity this preference will be reversed: the asset market is preferred, since it avoids inefficient liquidation if the bank reserve holdings turn out to be suboptimal.

Suggested Citation

  • Jürgen Eichberger & Willy Spanjers, 2007. "Liquidity and Ambiguity: Banks or Asset Markets?," Working Papers 0444, University of Heidelberg, Department of Economics, revised Jun 2007.
    • Handle: RePEc:awi:wpaper:0444
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial institutions; Liquidity; Ambiguity; Choquet Expected Utility.;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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