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Price Making Intermediation

Author

Listed:
  • Guido Lorenzoni

    (MIT)

  • George-Marios Angeletos

    (MIT)

Abstract

This paper explores the role of the financial sector in facilitating the flow of funds from borrowers to lenders. Unlike in traditional models of banking, the role of financial firms in our model is not to raise funds from lenders (depositors) and use them to make loans to borrowers. Rather their role is to act as informed traders in the market for the securities issued by the borrowers. By collecting information and taking large positions when prices deviate from fundamentals, financial firms help the price to be more stable and more informative, thus allowing uninformed lenders to allocate their funds more efficiently. We then explore how the balance sheets of the financial firms matters for the smooth functioning of this form of intermediation and discuss crises.

Suggested Citation

  • Guido Lorenzoni & George-Marios Angeletos, 2010. "Price Making Intermediation," 2010 Meeting Papers 963, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:963
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    References listed on IDEAS

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