Professor Stefan Nagel, Ross School of Business, University of Michigan
This paper proposes a theory that links the liquidity premium of near-money assets with the level of short-term interest rates: higher interest rates imply higher opportunity costs of money holdings and hence a higher premium for the liquidity service benefits of money substitutes. Consistent with this theory, short-term interest rates in the US, UK and Canada have a strong positive relationship with the liquidity premium of Treasury bills and other near-money assets. Treasury security supply variables lose their explanatory power for the liquidity premium once short-term interest rates are controlled for, which favours the opportunity-cost-of-money theory over asset supply-driven models.
Stefan Nagel is the Michael Stark Professor of Finance at the Ross School of Business and Professor of Economics in the Economics Department at the University of Michigan. Professor Nagel’s research spans topics in asset pricing, behavioural finance, and the study of financial crises. His current research examines the formation of subjective expectations and risk preference and the role they play in the formation of booms and busts in asset prices. He also studies the role of liquidity in financial crises. Professor Nagel has won various awards and fellowships, among them the Smith-Breeden Prize of the American Finance Association for the best paper in the Journal of Finance in 2004 and the Fama/DFA prize for the best asset pricing paper in the Journal of Financial Economics in 2006 (first prize) and 2010 (second prize). He is a research associate at the National Bureau of Economic Research and a research fellow at the Centre for Economic Policy Research. He is co-editor of the Review of Financial Studies, an associate editor of the Review of Asset Pricing Studies and the Review of Finance, and he has served as reviewer for the top finance and economics journals. Before joining the Ross School at the University of Michigan, Professor Nagel taught at the Stanford Graduate School of Business (2004-2013) and in the Economics Department at Harvard University (2003-2004). He received his PhD from London Business School in 2003.