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Governance by Depositors, Bank Runs and Ambiguity Aversion: A Theoretical Approach

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  • Francois Guillemin

    (National Research University Higher School of Economics)

Abstract

We investigate the theoretical relationship between ambiguity aversion and the decision to withdraw early from a deposit contract. We first document and define the concepts to illustrate our results. Then we extend the theoretical framework of Gorton (1985) to implement a model of maxmin expected utility to match the ambiguity aversion hypothesis. We observe that the most ambiguous depositors are more likely to mistakenly withdraw their deposits, reducing bank stability and leading to inefficient bank runs. We also show higher ambiguity levels negatively impact bank equity levels

Suggested Citation

  • Francois Guillemin, 2018. "Governance by Depositors, Bank Runs and Ambiguity Aversion: A Theoretical Approach," HSE Working papers WP BRP 68/FE/2018, National Research University Higher School of Economics.
    • Handle: RePEc:hig:wpaper:68/fe/2018
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    References listed on IDEAS

    as
    1. Wu, Yuliang & Bowe, Michael, 2012. "Information disclosure and depositor discipline in the Chinese banking sector," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 855-878.
    2. Yehning Chen & Iftekhar Hasan, 2008. "Why Do Bank Runs Look Like Panic? A New Explanation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 535-546, March.
    3. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 643-669.
    4. W. Viscusi & Harrell Chesson, 1999. "Hopes and Fears: the Conflicting Effects of Risk Ambiguity," Theory and Decision, Springer, vol. 47(2), pages 157-184, October.
    5. Kenneth R. Maccrimmon, 1968. "Descriptive and Normative Implications of the Decision-Theory Postulates," International Economic Association Series, in: Karl Borch & Jan Mossin (ed.), Risk and Uncertainty, chapter 0, pages 3-32, Palgrave Macmillan.
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    More about this item

    Keywords

    Banking governance; ambiguity aversion; depositor's behaviour; bank runs;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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