Cash-in-the-Market Asset Pricing in a Monetary Model with Over-the-Counter Asset Markets

We study how asset prices are aected by the amount of liquidityor cash that is available in asset markets. We …nd that higher levels of liquidity lead to higher asset price and lower bid-ask spreads. An increase in in‡ation increases asset returns and decreases asset prices. The amount of liquidity available in asset markets depends on the fraction of agents who do not have immediate consumption needs, which itself is a random variable. This implies that asset prices will ‡uctuate over time even though asset fundamentals are unchanged.