Price Making Intermediation

Guido Lorenzoni () and George-Marios Angeletos

No 963, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed010:963

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