ABSTRACT
This section early sale of assets and the joint determination of both the quantity and price of assets sold in the resulting fire-sale.
2.1 Model framework The framework of our proposed model is similar to Diamond and Rajan (2005). The model begins with an economy with a three-dated time horizon, date 0, 1 and 2. All contracts are drawn under uncertainties on date 0, and all uncertainties are resolved on date 1. The model characterises the choice of funding structure (deposit contract versus equity stock) when a bank maximises the net return to equity, taking into consideration of liquidity risk and fire-sale loss. As in Boyd and De Nicolò (2005), we use the number of banks as a measure for bank competition. The aim of this model is to determine how the choice of funding structure changes as the number of banks in the economy increases.
