Liquidity and Ambiguity: Banksor Asset Markets

We study the impact of ambiguity on two alternative institutions of nancial intermediationin an economy where consumers face uncertain liquidity needs. The ambiguitythe consumers experience is modeled by the degree of condence in their additive beliefs. Weanalyze the optimal liquidity allocation and two institutional settings for implementing thisallocation: a secondary asset market and a bank deposit contract.For full condence we obtain the well-known result that consumers prefer the bank depositcontract over the asset market, since the former can provide the optimal cross subsidy for consumerswith high liquidity needs. With increasing ambiguity this preference will be reversed:the asset market is preferred, since it avoids inefficient liquidation if the bank reserve holdingsturn out to be suboptimal.....