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Liquidity Provision, Ambiguous Asset Returns and the Financial Crisis
2018
Review of Economic Analysis
For an economy with dysfunctional intertemporal financial markets the financial sector is modelled as a competitive banking sector offering deposit contracts. In a setting related to Allen and Gale (JoF, 1998) properties of the optimal liquidity provision are analyzed for illiquid assets with ambiguous returns.In the context of our model, ambiguity -- i.e. incalculable risk -- leads to dynamically inconsistent investor behaviour. If the financial sector fails to recognize the presence of
doi:10.15353/rea.v10i4.1475
fatcat:hmiavzic2fflfgdtap3d3ndtmy