Cash-in-the-Market Asset Pricing in a Monetary Model with Over-the-Counter Asset Markets
نویسندگان
چکیده
We study how asset prices are affected by the amount of “liquidity”or cash that is available in asset markets. We find that higher levels of liquidity lead to higher asset prices and lower bid-ask spreads. An increase in inflation increases asset returns and decreases asset prices. The amount of liquidity available in asset markets depends on the fraction of agents who do not have immediate consumption needs, which itself is a random variable. This implies that asset prices will fluctuate over time even though asset fundamentals are unchanged.
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