Banks, markets, and financial stability

Arbeitspapier

We use a Diamond/Dybvig-based model with two banks operating in separate regions connected by a common asset market in which banks and sophisticated depositors invest. We study the effect of a potential run (crisis) and subsequent fire sales on the asset price in both the crisis and no-crisis state. In our model, the two are jointly determined by a cash-in-the-market pricing and a no-arbitrage condition. We find that (i) a higher crisis probability increases the liquidity premium and thus asset prices in the normal and crisis case and (ii) a higher share of sophisticated investors increases market depth and thus the crisis price while it might also raise the asset price in the normal state.

Object Details

• ISBN: 978-3-95729-079-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bundesbank Discussion Paper ; No. 31/2014

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: liquidity risk ; financial crises ; contagion ; asset price bubbles

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Eder, Armin ; Fecht, Falko ; Pausch, Thilo
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/104618
• Last update: 10.03.2025, 11:41 AM CET