NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

S. Rao Aiyagari, Mark Gertler

NBER Working Paper No. 3481
Issued in October 1990
NBER Program(s):   ME

(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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Document Object Identifier (DOI): 10.3386/w3481

Published: "Asset Returns with Transactions Costs and Uninsurable Individual Risk." Journal of Monetary Economics 27(3):311-331, June 1991. citation courtesy of

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