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- Title
A Note on Quantity versus Price Risk and the Theory of Financial Intermediation.
- Authors
SMITH, STEPHEN D.; GREGORY, DEBORAH WRIGHT; WEISS, KATHLEEN A.
- Abstract
The authors investigate the role of quantity or liquidity versus price risk and the theory of financial intermediation. They show that an intermediary facing quantity uncertainty, that is positively associated with interest rates, will make fewer loans when compared with a situation where risks are independent. They also show that the depository firm may not shrink in this case since it will offer a higher deposit rate in order to attract additional deposits, which can then be sold in a slack market. Under these conditions the existence of positively associated interest and liquidity risk leads to a situation where depository intermediaries limit their traditional lending operations while also raising an even larger quantity of funds to sell in the lower risk securities markets.
- Subjects
LIQUIDITY (Economics); INTERMEDIATION (Finance); FINANCIAL institutions; RISK; FINANCIAL markets; SECURITIES trading; INTEREST rates; LOANS; FINANCIAL management; RISK management in business; FINANCIAL institution management; BANK management; ECONOMICS
- Publication
Journal of Finance (Wiley-Blackwell), 1987, Vol 42, Issue 5, p1377
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1987.tb04372.x