The cost of capital in markets with opaque intermediaries and the risk-structure of interest rates

Fernando Mierzejewski ()

MPRA Paper from University Library of Munich, Germany

Abstract: The demand for cash balances of financial intermediaries that establish contractual liabilities with credit-sensitive customers is characterised. As stated by Merton, the success of the business activities of such firms crucially depends on their credit quality, and hence, they are obliged to rely on deposit insurance and capital cushions in order to assure that their promised payments are free of default. Unlike the Merton’s approach, the optimal guaranteeing contract is formulated in actuarial terms in this paper, because in this way the model can be extended to consider the situation of firms that can only hedge up to a limited extent. Within this framework, the equilibrium in the market determines the rate at which a unit of capital is exchange by a unit of risk, or, in other words, it determines the market price of risk. Episodes of liquidity crises are meaningful in this theoretical setting.

Keywords: The cost of capital; Liquidity preference; Monetary equilibrium; Financial instability; Liquidity crises (search for similar items in EconPapers)
JEL-codes: E41 E44 G14 G15 (search for similar items in EconPapers)
Date: 2008-07-31
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/9827/2/MPRA_paper_9827.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/14942/2/MPRA_paper_14942.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:9827

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().