IDEAS home Printed from https://ideas.repec.org/a/eee/mateco/v71y2017icp96-103.html
   My bibliography  Save this article

Asset price volatility and banks

Author

Listed:
  • Zhang, Yu

Abstract

This paper examines the operation of Diamond–Dybvig banks when depositors have access to the asset market. Previous studies have shown that banks are redundant in this environment since it is impossible to prevent the strategic withdrawals. This paper shows that the strategic withdrawals can be prevented if the market risk, due to asset price volatility, is considered. Banks provide deterministic returns to the depositors since the aggregate withdrawals are predictable, and therefore, banks can choose the portfolio such that no asset liquidation is involved. However, an individual consumer with stochastic liquidity need is vulnerable to the price volatility if he holds the asset directly. Therefore, banks improve the consumers’ welfare by providing the insurance against not only the liquidity shock but also the market risk. Banks are not redundant.

Suggested Citation

  • Zhang, Yu, 2017. "Asset price volatility and banks," Journal of Mathematical Economics, Elsevier, vol. 71(C), pages 96-103.
    • Handle: RePEc:eee:mateco:v:71:y:2017:i:c:p:96-103
    DOI: 10.1016/j.jmateco.2017.05.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304406816302415
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmateco.2017.05.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Haubrich, Joseph G. & King, Robert G., 1990. "Banking and insurance," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 361-386, December.
    2. Hellwig, Martin, 1994. "Liquidity provision, banking, and the allocation of interest rate risk," European Economic Review, Elsevier, vol. 38(7), pages 1363-1389, August.
    3. Diamond, Douglas W, 1997. "Liquidity, Banks, and Markets," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 928-956, October.
    4. Falko Fecht & Kevin X. D. Huang & Antoine Martin, 2008. "Financial Intermediaries, Markets, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 701-720, June.
    5. von Thadden, Ernst-Ludwig, 1999. "Liquidity creation through banks and markets: Multiple insurance and limited market access," European Economic Review, Elsevier, vol. 43(4-6), pages 991-1006, April.
    6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    7. von Thadden, Ernst-Ludwig, 1998. "Intermediated versus Direct Investment: Optimal Liquidity Provision and Dynamic Incentive Compatibility," Journal of Financial Intermediation, Elsevier, vol. 7(2), pages 177-197, April.
    8. Antinolfi, Gaetano & Prasad, Suraj, 2008. "Commitment, banks and markets," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 265-277, March.
    9. von Thadden, Ernst-Ludwig, 1997. "The term-structure of investment and the banks' insurance function," European Economic Review, Elsevier, vol. 41(7), pages 1355-1374, July.
    10. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
    11. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-955, September.
    12. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Fall), pages 3-16.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fan, Yi & Zhao, Xudong & Han, Zhonghe & Li, Jing & Badiei, Ali & Akhlaghi, Yousef Golizadeh & Liu, Zhijian, 2021. "Scientific and technological progress and future perspectives of the solar assisted heat pump (SAHP) system," Energy, Elsevier, vol. 229(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhang, Yu, 2017. "Asset price risk, banks and markets," Finance Research Letters, Elsevier, vol. 21(C), pages 21-25.
    2. von Thadden, Ernst-Ludwig, 1999. "Liquidity creation through banks and markets: Multiple insurance and limited market access," European Economic Review, Elsevier, vol. 43(4-6), pages 991-1006, April.
    3. Alexander Zimper, 2013. "Optimal Liquidity Provision Through a Demand Deposit Scheme: The Jacklin Critique Revisited," German Economic Review, Verein für Socialpolitik, vol. 14(1), pages 89-107, February.
    4. von Thadden, Ernst-Ludwig, 2002. "An incentive problem in the dynamic theory of banking," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 271-292, September.
    5. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    6. Niinimaki, Juha-Pekka, 2002. "Do time deposits prevent bank runs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 19-31, February.
    7. Simas Kucinskas, 2015. "Liquidity Creation without Banks," Tinbergen Institute Discussion Papers 15-101/VI, Tinbergen Institute.
    8. Falko Fecht & Antoine Martin, 2009. "Banks, markets, and efficiency," Annals of Finance, Springer, vol. 5(2), pages 131-160, March.
    9. Dietrich, Diemo & Gehrig, Thomas, 2021. "Speculative and precautionary demand for liquidity in competitive banking markets," LSE Research Online Documents on Economics 118869, London School of Economics and Political Science, LSE Library.
    10. Ettore Panetti, 2017. "A Theory of Bank Illiquidity and Default with Hidden Trades," Review of Finance, European Finance Association, vol. 21(3), pages 1123-1157.
    11. Lazopoulos, Ioannis, 2013. "Liquidity uncertainty and intermediation," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 403-414.
    12. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    13. Alexander Zimper, 2015. "Bank-Deposit Contracts Versus Financial-Market Participation in Emerging Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(3), pages 525-536, May.
    14. von Thadden, Ernst-Ludwig, 1997. "The term-structure of investment and the banks' insurance function," European Economic Review, Elsevier, vol. 41(7), pages 1355-1374, July.
    15. Antinolfi, Gaetano & Prasad, Suraj, 2008. "Commitment, banks and markets," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 265-277, March.
    16. Diamond, Douglas W., 1996. "Liquidity, banks, and markets : effects of financial development on banks and the maturity of financial claims," Policy Research Working Paper Series 1566, The World Bank.
    17. Qian, Yiming & John, Kose & John, Teresa A., 2004. "Financial system design and liquidity provision by banks and markets in a dynamic economy," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 385-403, April.
    18. Jason R. Donaldson & Giorgia Piacentino, 2019. "Money Runs," NBER Working Papers 26298, National Bureau of Economic Research, Inc.
    19. Douglas W. Diamond & Raghuram G. Rajan, 2005. "Liquidity Shortages and Banking Crises," Journal of Finance, American Finance Association, vol. 60(2), pages 615-647, April.
    20. Donald Morgan & Kathrine Samolyk, 2014. "Piggy Banks: Financial Intermediaries as a Commitment to Save," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(3), pages 271-286, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:71:y:2017:i:c:p:96-103. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jmateco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.