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Liquidity Provision, Interest-Rate Risk, and the Choice between Banks and Mutual Funds

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  • Jianping Qi

Abstract

This paper incorporates interest-rate risk and borrower moral hazard into the Diamond-Dybvig model. These new features enable a comparison of liquidity provision by monitoring and nonmonitoring financial intermediaries (banks and mutual funds). Bank monitoring weakens lending-rate constraints and thereby leads to improved risk sharing and enhanced interim investment. All else the same, high levels of consumer liquidity needs and risk aversion, high levels of interest rates and interest-rate variability, and low costs of bank monitoring appear to favor the choice of banks over mutual funds.

Suggested Citation

  • Jianping Qi, 2003. "Liquidity Provision, Interest-Rate Risk, and the Choice between Banks and Mutual Funds," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 159(3), pages 491-510, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200309)159:3_491:lpirat_2.0.tx_2-a
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    Cited by:

    1. Lazopoulos, Ioannis, 2013. "Liquidity uncertainty and intermediation," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 403-414.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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