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Liquidity and Ambiguity: Banks or Asset Markets?

Jürgen Eichberger and Willem Spanjers ()
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Willem Spanjers: Kingston University London

No 2003-11, Economics Discussion Papers from School of Economics, Kingston University London

Abstract: We study the impact of ambiguity on financial intermediation in an economy where agents have random liquidity needs. The ambiguity the agents face is modeled by the degree of confidence in their additive beliefs. We compare an optimal liquidity allocation with the allocation achieved by trade in an asset market, by a mutual fund, and by a competitive banking sector. For low levels of confidence, intermediation is superfluous. For intermediate levels the asset market, and for high levels of confidence banks are the preferred intermediary arrangements. The desirability of mutual funds depends crucially on the possibility of short sales. When short selling of fund shares is feasible, the asset market outcome results. If short sales are impossible, then a mutual fund can implement the optimal outcome for any degree of confidence.

Keywords: Financial institutions; Liquidity; Ambiguity; Choquet Expected Utility. (search for similar items in EconPapers)
JEL-codes: D80 G10 G20 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2003-10-01
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Related works:
Working Paper: Liquidity and Ambiguity: Banks or Asset Markets? (2007) Downloads
Working Paper: Liquidity and Ambiguity: Banks or Asset Markets? (2007) Downloads
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