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Liquidity, Equity Premium and Participation

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  • Benjamin Eden

    (Department of Economics, Vanderbilt University)

Abstract

I use price dispersion to model liquidity. Buyers may be rationed at the low price. An asset is more liquid if it is used relatively more in low price transactions and the probability that it will buy at the low price is relatively high. In the equilibrium of interest government bonds are more liquid than stocks. Agents with a relatively stable demand are willing to pay a high "liquidity premium" for holding bonds and they specialize in bonds. In equilibrium only a fraction of households (those with relatively unstable demand) hold stocks and the equity premium may be large.

Suggested Citation

  • Benjamin Eden, 2007. "Liquidity, Equity Premium and Participation," Vanderbilt University Department of Economics Working Papers 0715, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:0715
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Liquidity; sequential trade; equity premium puzzle; participation puzzle;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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