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Asset Prices and Liquidity in an Exchange Economy

Staff Report 373 | Published May 1, 2006

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Author

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Ricardo Lagos

Asset Prices and Liquidity in an Exchange Economy

Abstract

I develop an asset-pricing model in which financial assets are valued for their liquidity—the extent to which they are useful in facilitating exchange—as well as for being claims to streams of consumption goods. The implications for average asset returns, the equity-premium puzzle and the risk-free rate puzzle, are explored in a version of the model that nests the work of Mehra and Prescott (1985).