Liquidity and Ambiguity: Banks or Asset Markets?
Jürgen Eichberger and
Willy Spanjers ()
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Willy Spanjers: Department of Economics, Kingston University, Postal: Kingston-upon-Thames, Surrey KT1 2EE, United Kingdom
No 07-18, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim
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.
Pages: 39 pages
New Economics Papers: this item is included in nep-ban, nep-mac and nep-upt
Note: We would like to thank seminar participants at the Norwegian School of Management (Sandvika), the
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Working Paper: Liquidity and Ambiguity: Banks or Asset Markets? (2007)
Working Paper: Liquidity and Ambiguity: Banks or Asset Markets? (2003)
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