Liquidity Motives of Holding Money under Investment Risk: A Dynamic Analysis
Jones and Ostroy (1984) argue that money,as an asset of the least transaction cost, offers exibility to its holder, which other assets cannot provide. We extend the idea of Jones and Ostroy into a truely dynamic framework of infinite horizon with a risk-neutral decision-maker. We then investigate the effect of an increase in investment risk on the demand for liquidity a la Jones and Ostroy. In particular, we prove that the opitmal strategy exists, that it has a reservation property, and that the reservation value increases when investment risk increases in the sense of a mean-preserving spread. While the effect of a mean-preserving spread on the reservation value is unambiguous, its e ect on money demand is ambiguous. We then provide conditions on increasing investment risk under which money demand unambiguously increases.
|Date of creation:||Jul 2003|
|Date of revision:|
|Contact details of provider:|| Postal: Hongo 7-3-1, Bunkyo-ku, Tokyo 113-0033|
Web page: http://www.cirje.e.u-tokyo.ac.jp/index.html
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ozaki, Hiroyuki & Streufert, Peter A., 1996. "Dynamic programming for non-additive stochastic objectives," Journal of Mathematical Economics, Elsevier, vol. 25(4), pages 391-442.
When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2003cf232. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CIRJE administrative office)
If references are entirely missing, you can add them using this form.