Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/162923
Authors: 
Li, Yang
Year of Publication: 
2016
Series/Report no.: 
Departmental Working Papers, Rutgers University, Department of Economics 2016-01
Abstract: 
What configuration of asset returns will make the banking system most susceptible to a self-fulfilling run? I study this question in a version of the model of Diamond and Dybvig (1983) with limited commitment and a non-trivial portfolio choice. I show that the relationship between the returns on banksĀ“ assets and financial fragility is often non-monotone: a higher return may make banks either more or less susceptible to a run by depositors. The same is true for changes in the liquidation cost and the term premium. I derive precise conditions under which changes in each of these returns increase or decrease financial fragility.
Subjects: 
financial fragility
bank runs
excess liquidity
JEL: 
G11
G21
Document Type: 
Working Paper

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