(Note: analysis points are based on my own research. Even thought some references are same as Cochrane’s article, it has been cited from respective journals and websites, and not from the article)
3.1. Analysis of runs and run-prone assets
Cochrane defined run-prone assets based on the characteristics drawn by Diamond & Dybvig (1983). Diamond & Dybvig (1983) created a model to study the economics of banking and associated policy disputes. According to Diamond & Dybvig (1983) during a bank run, depositors expect banks to fail, so, they immediately withdraw deposits. As a result banks try to liquidate many assets at a loss. Their results stated that if the central bank is not obligatory to bail out banks unconditionally, a bank run could follow in reaction to changes in depositor expectation about the bank’s credit worthiness. In contrast, Diamond & Dybvig (1983) result also showed deposit insurance as a binding commitment that can be making top management of the bank accountable in case of a failure.
3.2. Initial point of runs: Shadow-banking runs
According to Cochrane, a run in the shadow banking system is well described by Duffie …show more content…
According to him, this allows more competition through electronic transactions that we do not require holding huge inventory of securities. He provided examples how this works by using to pay your monthly credit-card bill from your exchanged-traded stock fund and using your ATM to sell $100 of that fund if cash need, or using your smart phone on a cash register to buy coffee using that fund. And as per him, this does not require anyone to hold risk-free or fixed-value assets. (Cochrane, 2013). However, Krugman (2014) made a controversial comment on Cochrane proposal saying “the manager of your index fund sells a tiny piece of your stock portfolio every time you use a debit card at 7-11. Is this