Asset Classes

Nicolas Jacquet

Journal of Political Economy, 2021, vol. 129, issue 4, 1100 - 1156

Abstract: This paper proposes a theory of endogenous differences in liquidity of assets based on the interaction between differences in their risk and differences in liquidity needs of agents. An equilibrium of the model displays a class structure, where agents sort themselves across different types of assets according to their types. High-liquidity-need agents hold on to safer portfolios than lower-liquidity-need agents whenever the variation in the value of liquidity across states raises the value of safe assets more than that of riskier assets, and vice versa. I also derive capital asset pricing model–like formulas for excess returns where the risk and liquidity premia are interdependent and specific to each type of agent.

Date: 2021
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Citations: View citations in EconPapers (3)

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