Liquidity uncertainty and intermediation

Ioannis Lazopoulos

Journal of Banking & Finance, 2013, vol. 37, issue 2, 403-414

Abstract: The paper performs a welfare comparison between demand deposit and equity contracts in the presence of intrinsic aggregate uncertainty. In this framework, the welfare dominance of deposit contracts emerges under corner preferences. It is shown that aggregate uncertainty creates high price volatility of ex-dividend equity claims traded in a secondary market and the resulting consumption allocations offer less risk-sharing opportunities to risk-averse consumers than tailor-made deposit contracts. The contingency of early payoffs on depositors’ withdrawal order reinforces the welfare performance of deposit contracts, whereas costly liquidation of productive long-term investments deteriorates their welfare performance relative to equity contracts.

Keywords: Financial intermediation; Liquidity uncertainty; Deposit contract; Equity contract (search for similar items in EconPapers)
JEL-codes: D81 D82 G21 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:2:p:403-414

DOI: 10.1016/j.jbankfin.2012.09.026

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