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Asset Returns with Transactions Cost and Uninsured Risk: A Stage III Exercise

  • S. Rao Aiyagari
  • Mark Gertler

(iii) Transaction velocities are much higher for liquid assets than for stocks, specifically, we explore the extent to which incorporating an explicit motive for holding liquid assets can explain the above observations. We introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities. We then parameterize a class of such models and compute the stationary equilibria. The simulations indicate that attempting to match the return data generates a ratio of liquid assets to income considerably be low observed levels. We then explore some possible reasons for this discrepancy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3481.

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Date of creation: Oct 1990
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Publication status: published as "Asset Returns with Transactions Costs and Uninsurable Individual Risk." Journal of Monetary Economics 27(3):311-331, June 1991.
Handle: RePEc:nbr:nberwo:3481
Note: ME
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  1. Kydland, Finn E., 1984. "A clarification: Using the growth model to account for fluctuations : Reply to James Heckman," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 225-230, January.
  2. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  3. Pamela Labadie, 1989. "Stochastic inflation and the equity premium," Discussion Paper / Institute for Empirical Macroeconomics 12, Federal Reserve Bank of Minneapolis.
  4. Imrohoroglu, Ayse, 1992. "The welfare cost of inflation under imperfect insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 79-91, January.
  5. John M. Abowd & David Card, 1986. "Intertemporal Labor Supply and Long Term Employment Contracts," NBER Working Papers 1831, National Bureau of Economic Research, Inc.
  6. Mankiw, N. Gregory, 1986. "The equity premium and the concentration of aggregate shocks," Journal of Financial Economics, Elsevier, vol. 17(1), pages 211-219, September.
  7. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
  8. James M. Nason, 1988. "The equity premium and time-varying risk behavior," Finance and Economics Discussion Series 11, Board of Governors of the Federal Reserve System (U.S.).
  9. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Clark, 1991. "The Equity Premium and the Risk Free Rate: Matching the Moments," NBER Working Papers 3752, National Bureau of Economic Research, Inc.
  10. Otrok, C. & Ravikumar, B. & Whiteman, C., 1998. "Habit Formation: A Resolution of the Equity Premium Puzzle?," Working Papers 98-04, University of Iowa, Department of Economics.
  11. Larry G. Epstein & Stanley E. Zin, 1987. "Substitution, Risk Aversion and the Temporal Behaviour of Consumption and Asset Returns II: An Empirical Analysis," Working Papers 698, Queen's University, Department of Economics.
  12. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  13. Kahn, J.A., 1988. "Moral Hazard, Imperfect Risk-Sharing, And The Behavior Of Asset Returns," RCER Working Papers 152, University of Rochester - Center for Economic Research (RCER).
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