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Liquidity, Equity Premium and Participation

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Author Info
Benjamin Eden () (Department of Economics, Vanderbilt University)

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Abstract

I use price dispersion to model liquidity. Buyers may be rationed at the low price. An asset is more liquid if it is used relatively more in low price transactions and the probability that it will buy at the low price is relatively high. In the equilibrium of interest government bonds are more liquid than stocks. Agents with a relatively stable demand are willing to pay a high "liquidity premium" for holding bonds and they specialize in bonds. In equilibrium only a fraction of households (those with relatively unstable demand) hold stocks and the equity premium may be large.

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File URL: http://www.vanderbilt.edu/Econ/wparchive/workpaper/vu07-w15.pdf
File Format: application/pdf
File Function: First version, 2007
Download Restriction: no

Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0715.

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Date of creation: Sep 2007
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Handle: RePEc:van:wpaper:0715

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Related research
Keywords: Liquidity; sequential trade; equity premium puzzle;
> participation puzzle

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Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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This page was last updated on 2009-11-28.

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