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LAPM: A Liquidity‐Based Asset Pricing Model

Author

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  • Bengt Holmström
  • Jean Tirole

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 asset 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, thereby, interest rates.

Suggested Citation

  • Bengt Holmström & Jean Tirole, 2001. "LAPM: A Liquidity‐Based Asset Pricing Model," Journal of Finance, American Finance Association, vol. 56(5), pages 1837-1867, October.
    • Handle: RePEc:bla:jfinan:v:56:y:2001:i:5:p:1837-1867
    DOI: 10.1111/0022-1082.00391
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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