Date of Award
Doctor of Philosophy (PhD)
This dissertation examines the effects of loan and deposit quantity uncertainty and risk aversion on: (1) the spread between the risk averse loan and deposit rates, and (2) the behavior of the intermediary in the Federal funds market. The intermediary's major function is to provide transaction and liquidity services to its customers. Theoretical results indicate that quantity uncertainty from either loans or deposits reduces the spread to a level below that of a profit maximizing intermediary. The pure effects of quantity uncertainty on the intermediary's spread are consistent and mutually reinforcing regardless of whether uncertainty comes from loans or deposits. Comparative statics results reveal that, under decreasing absolute risk aversion, the management of the spread may be significantly different than it is under risk neutrality. The model's results imply that deposit variability is an increasing function of size and of the degree of liquidity in the intermediary's asset portfolio. On the other hand, deposit variability appears to have no effect on the intermediary's loan rate. The results presented in this dissertation have a number of important implications for several aspects of the theory of depository financial intermediaries.
Zarruk, Emilio Ramon, "Loan and Deposit Rate Setting, Risk Aversion, Uncertainty and the Theory of Depository Financial Intermediaries." (1985). LSU Historical Dissertations and Theses. 4113.