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CONSUMER DEMAND FOR LIQUIDITY
7th set of transparencies for ToCF
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Consumers, like firms, may face liquidity shocks.
II.
RunsIII. Heterogenous consumers and security
design.
3 topics:I. Financial institutions as
liquidity pools: fundamental (no self-provision) insurers (flatten term structure to reduce cost of impatience):
more fragile!
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I. DIAMOND-DYBVIG (1983) - MODEL AND VARIANTS
Consumer demand:
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Technological yield curve
with (no dominance)
Technological yield curve:
Self-provision of liquidity is inefficient
Intuitions: hoarding liquidity is costly, liquidity is wasted if no liquidity shock.
AUTARKY(Strong form: no financial markets at date 1, not only lack of planning at date 0).
Example:
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match maturities with consumptionsSocial optimum
if independent shocks
either or
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not optimal to perfectly insure
Flattening of the yield curve.
CRRA 1 cu' decreasing
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dividend i1 at date 1.
IMPLEMENTATION
(assume can be verified. See below).
(2) Mutual fund
invests
Impatients consume [i1+p] ( p = resale price)
(1) Deposit contract: can withdraw at date 1
or at date 2
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Not true for more general preferences
mutual fund equalizes only MRS; more conditions.
Patients get
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JACKLIN CRITIQUE
General theme: markets conflict with optimal insurance.
back to technological yield curve
DD INSURANCE INCOMPATIBLE WITH EXISTENCE OF FINANCIAL
MARKETS TO WHICH AGENTS HAVE ACCESS.
Here: bypass. Invest
if patient:if impatient: resell to patient depositors (who then withdraw ).
With can buy (%) of value R
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COMPARISON WITH CORPORATE LIQUIDITY DEMAND insurance against liquidity shocks liquidity costly to create:
return on ST investment< return on LT investment
need right hoarding + dispatching
Analogies
:
autarky given strong meaning (no trading of claims in financial markets), incompatibility with financial markets,consumer’s LT claim fully pledgeable.
Differences:
VARIANTS
(a) OLG: could have i1 = 0 (liquidity newcomers)
Not IC, though: flat yield curve
(b) Macroshocks: Hellwig 1994 on interest rate shocks.
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II. RUNS
Suppose
Preferences : if patient, if impatient (but has access to
storage technology 1 1 between dates 1 and 2).
receives if
withdraws,if does not.
Suppose now withdraw ( is an equilibrium)
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ANTI-RUN POLICIES
suspension of convertibility, credit line,
LOLR, interbank and other liquidity markets.
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(1) R uncertain ( or ) not commonly observed at date 1.
III. HETEROGENEOUS CONSUMER HORIZONS: GORTON - PENNACCHI (1990)
Consumers have different probabilities of experiencing shock.DD with 3 twists:
“Potential liquiditytraders” ()
“LT investors”(1-)
(2) random and unobservable ( or )
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To simplify, 2 states
SUPPOSE ISSUE EQUITY
= price discount (no such discount if only LT investors buy).
(3) Speculator (preferences ) : learns state at date 1, can buy shares.
order flow in state L:
order flow in state H:
loss per potential liquidity trader
full pooling
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Discussion.
if
DEBT AS A LOW INFORMATION INTENSITY SECURITY