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Money and Stock Returns: Is there habit formation for holding liquid assets?

Author

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  • Petri Mäki-Fränti

    (School of Management, University of Tampere)

Abstract

Assuming a utility function, which is non-separable in money and consumption, we derive a simple, non-linear asset pricing model, according to which investors’ willingness to hold liquid assets in their portfolio can be described by a sort of habit formation. The parameters of the empirical model derived from our theoretical model are estimated with the Smooth Transition Regression (STR) models for the US data. The results of our econometric exercise to test the hypothesis of habit formation remain mixed, but we find evidence, which supports some existing, related attempts to explain stock returns by the liquidity of the economy relative to investors’ target level for liquidity.

Suggested Citation

  • Petri Mäki-Fränti, 2006. "Money and Stock Returns: Is there habit formation for holding liquid assets?," Working Papers 0647, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:0647
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    File URL: http://urn.fi/urn:isbn:951-44-6585-7
    File Function: First version, 2006
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    More about this item

    Keywords

    asset pricing models; liquidity;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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