liquidity preference theory


Observation that, all else being equal, people prefer to hold on to cash (liquidity) and that they will demand a premium for investing in non-liquid assets such as bonds, stocks, and real estate. The theory suggests that the premium demanded for parting with cash increases as the period (term) for getting the cash back increases. The rate in the increase of this premium, however, slows down with the increase in term. In the language of financial trading, this theory is expressed as "forward rates should exceed the future spot rates." This concept was first expressed by the U.K.
economist John Maynard Keynes (1883-1946). also called liquidity preference hypothesis.

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You may want to figure out if there is a way to make the liquidity preference theory work for your company.

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The liquidity preference theory was in full force as it was easy to the see the existence of people valuing cash.

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The liquidity preference theory was really shown to be relevant when the first investor realized his liquid assets would be invested in long term period investments, he demanded a premium on non-liquid asset to justify his thought risk.

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