Publication: Optimal allocation of interest rate risk
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1997-02
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Abstract
Based on the work of Hellwig (1994), this paper characterizes the optimal allocation of technology-induced interest rate risk in a competitive system of financial intermediation and its interdependence with the provision of liquidity. The analysis is carried out under the assumptions of complete and incomplete information respectively.
The implementation of the second best allocation by a financial intermediary is compared to the one achieved in an equity economy in which individuals hold the assets directly.
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Banking, Deposit contracts, Liquidity, Interest rate risk