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Liquidity uncertainty and intermediation

Lazopoulos, I (2012) Liquidity uncertainty and intermediation Journal of Banking & Finance, 37 (2). 403 - 414. ISSN 0378-4266

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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.

Item Type: Article
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Banking & Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking & Finance, 37(2), October 2012, DOI 10.1016/j.jbankfin.2012.09.026.
Uncontrolled Keywords: Financial intermediation, Liquidity uncertainty, Deposit contract, Equity contract
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Divisions: Faculty of Business, Economics and Law > Economics
Depositing User: Symplectic Elements
Date Deposited: 30 Nov 2012 12:05
Last Modified: 23 Sep 2013 19:50
URI: http://epubs.surrey.ac.uk/id/eprint/735786

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