Liquidity premium
The liquidity premium (liquidity preference) is a term coined by John Maynard Keynes from his work General Theory of Employment, Interest and Money . It describes the determination of the minimum interest rate that results from the supply and demand for money.
Keynes' theory says that interest cannot be a reward for saving in itself. Because "money held" has an advantage inherent in liquidity (liquidity preference) , a prerequisite for granting credit and investing is that at least the loss of liquidity use is compensated as an advantage of disposal ("premium for foregoing liquidity", liquidity waiver premium).
So it is the amount that the debtor has to pay the creditor for giving up liquidity in order to offset the inherent advantage of liquidity over tied-up money . As a result, in Keynesianism, a component of the interest rate is the premium, measured as a price , which is to be paid for the abandonment of liquidity (purchasing power and liquidity advantage) over the measured contract term. According to Keynes, the loan interest should ideally not only balance out the liquidity preference but also the inflation rate and cover the credit risk .
Likewise, the ideal and emotional value of an illiquid asset can be calculated, for which someone is willing to provide his liquid funds as an expense allowance. According to Keynes, this can be translated as an advantage of disposal .
theory
According to Keynes, every asset has a liquidity premium. He distinguishes between three economic variables for an asset:
- the productivity (English "yield") q of an asset that supports a production process or provides other services;
- Carrying costs ( "carrying cost") c in the form of impairment by corruption and obsolescence as well as costs for maintenance, storage and insurance;
- Liquidity Preference l , a "potential convenience or security";
The overall advantage of a commodity, its own interest ( "own-rate of interest"), then " productivity minus carrying costs plus liquidity premium ", that " q - c + l ".
In the case of production capital (for example machines) or working capital (buildings), the productivity value outweighs the other two values (“you get something out of it”). In the case of unnecessary and superfluous goods, the maintenance costs predominate (“you have to look after and protect them and you only have to spend time with them”). In the case of money, the productivity value is 0 and the maintenance costs (for storage and security) are low, but the liquidity premium is significant (“you can buy something for it”). The particular difference between money and almost all other assets is that in the case of money the liquidity premium strongly outweighs the stamina cost factor, while conversely in the case of other assets the stamina costs strongly outweigh the liquidity premium.
In addition, the term is used in asset pricing theory for the premium that investors are willing to pay in order to acquire a particularly liquid instrument. It is particularly common, for example, that market participants hold government bonds, which are particularly liquid, but have a lower return than less liquid bonds.
example
For the flower seller, the bouquet has a productivity value when she sells it: the proceeds from the sale. He also incurs stamina costs: she has to put him in the water. However, he does not have a liquidity premium for her because she wants to get rid of him. If she can't sell it and if she has to throw it away, then all she has to do is keep it going. This also includes the costs for disposal and depreciation (in this case, the complete devaluation of the bouquet).
For a buyer, the bouquet no longer has any productivity value because she no longer wants to sell it. On the other hand, he has a liquidity premium for her, which is why she bought it: depending on the joy she feels when giving it away, or - if she keeps it herself - the joy in its beauty and its fragrance. But she has to accept the cost of staying power: she has to put it in the water, replace it every now and then and cut the stems again.
literature
- John Maynard Keynes: `` The General Theory of Employment, Interest and Money ''. Macmillan, London et al. a. 1936. In German translation by Fritz Wager: "General theory of employment, interest and money". Publishing house Duncker & Humblot, Munich u. a. 1936. Many other editions, 2016 is up to date: The 11th, improved edition, supplemented by an explanation of the structure by Jürgen Kromphardt / Stephanie Schneider, Duncker & Humblot, Berlin 2009, ISBN 978-3-428-12912-6 .
Individual evidence
- ^ General Theory of Employment, Interest, and Money, by Keynes
- ^ Longstaff: The flight-to-liquidity premium on US Treasury. In: https://cloudfront.escholarship.org/dist/prd/content/qt7dc0t95b/qt7dc0t95b.pdf . Retrieved April 25, 2019 .