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Asset Classes

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  • Nicolas L. Jacquet

Abstract

This paper proposes a theory of endogenous differences in liquidity of assets based on the interaction between differences in their risk and differences in liquidity needs of agents. An equilibrium of the model displays a class structure, where agents sort themselves across different types of assets according to their types. High-liquidity-need agents hold on to safer portfolios than lower-liquidity-need agents whenever the variation in the value of liquidity across states raises the value of safe assets more than that of riskier assets, and vice versa. I also derive capital asset pricing model–like formulas for excess returns where the risk and liquidity premia are interdependent and specific to each type of agent.

Suggested Citation

  • Nicolas L. Jacquet, 2021. "Asset Classes," Journal of Political Economy, University of Chicago Press, vol. 129(4), pages 1100-1156.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/712736
    DOI: 10.1086/712736
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    Cited by:

    1. James B. Davies & Samantha L. Black, 2020. "Distributional Effects of Flooding, with an Application to a Major Urban Area," University of Western Ontario, Departmental Research Report Series 20201, University of Western Ontario, Department of Economics.
    2. Athanasios Geromichalos & Lucas Herrenbrueck & Sukjoon Lee, 2023. "Asset Safety versus Asset Liquidity," Journal of Political Economy, University of Chicago Press, vol. 131(5), pages 1172-1212.
    3. Wang, Zijian, 2019. "Trading Motives in Asset Markets," MPRA Paper 91401, University Library of Munich, Germany.

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