Lapm: A Liquidity-Based Asset Pricing Model

35 Pages Posted: 26 Jul 2000

See all articles by Bengt R. Holmström

Bengt R. Holmström

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI); University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2000

Abstract

The intertemporal CAPM predicts that an asset's price is equal to the expectation of the product of the asset's payoff and a representative consumer's intertemporal marginal rate of substitution. This paper develops an alternative approach to assest pricing based on corporations' desire to hoard liquidity. Our corporate finance approach suggests new determinants of asset prices such as the distribution of wealth within the corporate sector and between the corporate sector and the consumers. Also, leverage ratios, capital adequacy requirements, and the composition of savings affect the corporate demand for liquid assets and therby interest rates.

This paper first sets up a general model of corporate demand for liquid assets, and obtains an explicit formula for the associated liquidity permia. It then derives some implications of corporate liquidity demand for the equity premium puzzle, for the yield curve, and for the state-contingent volatility of asset prices.

JEL Classification: G1

Suggested Citation

Holmström, Bengt R. and Tirole, Jean, Lapm: A Liquidity-Based Asset Pricing Model (September 2000). Available at SSRN: https://ssrn.com/abstract=237497 or http://dx.doi.org/10.2139/ssrn.237497

Bengt R. Holmström (Contact Author)

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Jean Tirole

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Centre for Economic Policy Research (CEPR)

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