We explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post-war U.S. economy: (i) the low, risk-free real interest rate, (ii) the large spread between returns on liquid assets and stocks, and (iii) the greater transaction velocity of liquid assets relative to stocks. We introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities. Numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels.
ASJC Scopus subject areas
- Economics and Econometrics