NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

LAPM: A Liquidity-based Asset Pricing Model

Bengt Holmstrom, Jean Tirole

NBER Working Paper No. 6673
Issued in August 1998
NBER Program(s):   AP   CF

The intertemporal CAPM predicts that an asset's price is equal to the expectation of the product of the asset's payoff and a representative consum substitution. This paper develops an alternative approach to asset pricing based on industrial and financial corporations' desire to hoard liquidity to fulfill future cash needs. Our corporate finance a determinants of asset prices such as the distribution of wealth within the corporate sector and between the corporate sector and the consumers. Also, leverage ratios, capital adequacy requirements, and the composition of savings affect the corporate demand for li The paper first sets up a general model of corporate demand for liquid assets, and obtains an explicit formula for the associated liquidity permia. It then derives some implications of corporate liquidity demand for the equity premium puzzle, for the yield curve, and for the state-contingent volatility of asset prices. Finally, the paper looks at some macroeconomic implications of the theory. It shows that government may be able to boost aggregate liquidity and enhance economic efficiency by promoting job and asset price stability. On the liability side, long-term deposits and equity investments, which depend on the consumers' endogenously determined liquidity needs, contribute to creating a feedback effect between employment prospects and equity-like investments. On the asset side, orderly sales of real estate by liquidity-squeezed institutions may generate a Pareto improvement

download in pdf format
   (382 K)

email paper

This paper is available as PDF (382 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6673

Published: Holmstrom, Bengt and Jean Tirole. "LAPM: A Liquidity-Based Asset Pricing Model," Journal of Finance, 2001, v56(5,Oct), 1837-1867.

Users who downloaded this paper also downloaded these:
Pastor and Stambaugh w8462 Liquidity Risk and Expected Stock Returns
Holmstrom and Tirole w5817 Private and Public Supply of Liquidity
Acharya and Pedersen w10814 Asset Pricing with Liquidity Risk
Grossman and Miller w2641 Liquidity and Market Structure
Vayanos w10327 Flight to Quality, Flight to Liquidity, and the Pricing of Risk
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us