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Journal Article

LAPM: A Liquidity-Based Asset Pricing Model

Bengt Holmström and Jean Tirole
The Journal of Finance
Vol. 56, No. 5 (Oct., 2001), pp. 1837-1867
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/2697740
Page Count: 31
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LAPM: A Liquidity-Based Asset Pricing Model
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Abstract

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 consumer's intertemporal marginal rate of substitution. This paper develops an alternative approach to asset pricing based on corporations' desire to hoard liquidity. Our corporate finance approach suggests new 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 liquid assets and, thereby, interest rates.

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