Further processing options
Asset Prices in an Exchange Economy with Money and Trade
Saved in:
Authors and Corporations: | , |
---|---|
Other Authors: | Tsomocos, Dimitrios P. [Other] |
Type of Resource: | E-Book |
Language: | Undetermined |
published: | |
Source: | Verbunddaten SWB Lizenzfreie Online-Ressourcen |
Summary: | We show, in an exchange economy with liquidity constraints, that state prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank. Our model is derived along the lines of Dubey and Geanakoplos (1992). Two agents trade goods and nominal assets (Arrow-Debreu (AD) securities) to smooth consumption across periods and future states, in the presence of cash-in-advance financing costs. We show, with Von Neumann-Morgenstern utility functions and relative risk-aversion greater than 1, that the price of AD securities, are inversely related to liquidity. A closed-from solution is obtained for a CRRA utility function, even when including aggregate uncertainty and different subjective probabilities for the two agents. The upshot of our argument is that agents' expectations computed using risk-neutral probabilities give more weight in the states with higher interest rates. This result cannot be found in a Lucas-type representative agent general equilibrium model where there is neither trade nor money. Hence, an upward yield curve can be supported in equilibrium, even though short-term interest rates are fairly stable, and even in the absence of aggregate uncertainty. The risk-premium in the term structure is therefore a pure liquidity risk premium |
---|---|
Item Description: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments 2007 erstellt |
Physical Description: | 1 Online-Ressource (28 p) |
DOI: | 10.2139/ssrn.966433 |
Access: | Open Access |