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Markets Do Not Select For a Liquidity Preference as Behavior Towards Risk

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  • Thorsten Hens
  • Klaus Reiner Schenk-Hoppé

Abstract

Tobin (1958) has argued that in the face of potential capital losses on bonds it is reasonable to hold cash as a means to transfer wealth over time. It is shown that this assertion cannot be sustained taking into account the evolution of wealth of cash holders versus non cash holders. Cash holders will be driven out of the market in the long run by traders who only use a (risky) long-lived asset to transfer wealth.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 139.

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Handle: RePEc:zur:iewwpx:139

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Keywords: demand for money; portfolio theory; evolutionary finance;

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References

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  1. LeBaron, Blake, 2001. "Evolution And Time Horizons In An Agent-Based Stock Market," Macroeconomic Dynamics, Cambridge University Press, vol. 5(02), pages 225-254, April.
  2. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
  3. Hellwig Martin F., 1995. "The Assessment of Large Compounds of Independent Gambles," Journal of Economic Theory, Elsevier, vol. 67(2), pages 299-326, December.
  4. Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Market Selection of Financial Trading Strategies: Global Stability," IEW - Working Papers 083, Institute for Empirical Research in Economics - University of Zurich.
  5. Luenberger, David G., 1993. "A preference foundation for log mean-variance criteria in portfolio choice problems," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 887-906.
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  7. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
  8. Mark Rubinstein., 1991. "Continuously Rebalanced Investment Strategies," Research Program in Finance Working Papers RPF-205, University of California at Berkeley.
  9. Arthur, W.B. & LeBaron, B. & Palmer, R., 1997. "Time Series Properties of an Artificial Stock Market," Working papers 9725, Wisconsin Madison - Social Systems.
  10. William A. Brock & Cars H. Hommes, 1995. "Rational Routes to Randomness," Working Papers 95-03-029, Santa Fe Institute.
  11. Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
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  13. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  14. Shefrin, Hersh M. & Statman, Meir, 1984. "Explaining investor preference for cash dividends," Journal of Financial Economics, Elsevier, vol. 13(2), pages 253-282, June.
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Cited by:
  1. J. Emeterio Navarro Barrientos & Frank E. Walter & Frank Schweitzer, 2008. "Risk-Seeking versus Risk-Avoiding Investments in Noisy Periodic Environments," Papers 0801.4305, arXiv.org, revised Sep 2008.
  2. Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2006. "Asset price and wealth dynamics in a financial market with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1755-1786.
  3. Igor V. EVSTIGNEEVY & Thorsten HENS & Klaus Reiner SCHENK-HOPPE, . "An evolutionary financial market model with a risk-free asset," Swiss Finance Institute Research Paper Series 10-36, Swiss Finance Institute.

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