TOWARDS A GENERAL THEORY OF LIQUIDITY PREFERENCE
TOWARDS A GENERAL THEORY OF LIQUIDITY PREFERENCE

Summary/Abstract: A general theory of liquidity is proposed. The major hypothesis advanced in the paper is that individuals do face borrowing restrictions in capital markets. The value of portfolios combining risky assets and cash balances is then related to the price assigned in some market of deposit insurance, and is accordingly characterised by a method suggested by actuarial researchers ¾ and commonly used by insurers and reinsurers. It is demonstrated that in this way, macroeconomics, financial economics and actuarial sciences fuse together in a unified theoretical framework, which can be applied as an alternative to the utility maximisation approach. Episodes of liquidity crises, which lack an explanation under classic economic theory, are meaningful within the new theoretical setting.

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