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Price Making Intermediation

Listed author(s):
  • Guido Lorenzoni

    (MIT)

  • George-Marios Angeletos

    (MIT)

This paper explores the role of the financial sector in facilitating the flow of funds from borrowers to lenders. Unlike in traditional models of banking, the role of financial firms in our model is not to raise funds from lenders (depositors) and use them to make loans to borrowers. Rather their role is to act as informed traders in the market for the securities issued by the borrowers. By collecting information and taking large positions when prices deviate from fundamentals, financial firms help the price to be more stable and more informative, thus allowing uninformed lenders to allocate their funds more efficiently. We then explore how the balance sheets of the financial firms matters for the smooth functioning of this form of intermediation and discuss crises.

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File URL: https://economicdynamics.org/meetpapers/2010/paper_963.pdf
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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 963.

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Date of creation: 2010
Handle: RePEc:red:sed010:963
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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