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Liquidity and Ambiguity: Banks or Asset Markets?

Author

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  • Eichberger, Jürgen

    (Sonderforschungsbereich 504)

  • Spanjers, Willy

    (Department of Economics, Kingston University)

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 inecient liquidation if the bank reserve holdings turn out to be suboptimal.

Suggested Citation

  • Eichberger, Jürgen & Spanjers, Willy, 2007. "Liquidity and Ambiguity: Banks or Asset Markets?," Sonderforschungsbereich 504 Publications 07-18, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:07-18
    Note: We would like to thank seminar participants at the Norwegian School of Management (Sandvika), the
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    File URL: http://www.sfb504.uni-mannheim.de/publications/dp07-18.pdf
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    Cited by:

    1. Spanjers, Willem, 2005. "Loss of confidence and currency crises," Economics Discussion Papers 2005-2, School of Economics, Kingston University London.

    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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