LAPM: A Liquidity-Based Asset Pricing Model


  • Bengt Holmström,

  • Jean Tirole

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    • Bengt Holmström is from the Department of Economics, Massachusetts Institute of Technology, and Jean Tirole is from IDEI (Toulouse, France). The authors are grateful to Olivier Blanchard, Steven Busar, Mathias Dewatripont, Douglas Diamond, Peter Diamond, Arvind Krishnamurthy, Stephen Ross, Jeremy Stein, René Stulz, Xavier Vives, and two referees for helpful discussions and comments. This research was supported by a grant from the National Science Foundation.


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.