Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

EXPECTATIONS AND STOCK MARKET PRICESKeynes’s ‘bull-bear’ analysis goes beyond Miller’s in that itpermits short selling 17 and takes into account the ‘conventional’behaviour of investors on markets that have been organised toprovide liquidity. Furthermore, whereas Miller focuses on a single(non-blue chip) share, Keynes’s general equilibrium analysis ismeant to explain the core of interest rates in general. In its simplifiedform in the General Theory, the amount of liquidity is taken as givenand securities prices alone (bonds and blue chip shares) have toadjust to bring forth a bear position of equal and unchanged size.The point to note is that although these prices represent a crucialsegment of the structure of demand prices for existing assets, theydo not reveal anything in particular about the differentconsiderations and beliefs that affect investors’ individualvaluations. Keynes’s notion of ‘own rates of interest’ sheds somelight on these matters, and it is to this which we now turn.Own rates of interest and the liquidity premiumKeynes defines the total return on any asset measured in terms ofitself as the sum of q-c+l, where q is the risk-adjusted yield, c thecarrying cost and l the liquidity premium. The liquidity premium onan asset is not a pecuniary return, but a reflection of the potentialconvenience or security that the power of disposal over that assetduring some period offers (Keynes 1973:226). To compare thereturns of different assets, changes in their relative values a oversome period must also be considered, and, expressed in somecommon measure, the total return on an asset is then the sum of q-c+l+a. An overall portfolio equilibrium requires, first, that allexisting assets are held by someone and, second, that every portfolioinvestor is happy with the composition of his or her portfolio at thecurrent structure of asset prices. Clearly, such an equilibrium iscompatible with investors holding different beliefs about thestructure of relative returns and their components on different kindsof assets.According to Keynes, the crucial point is that money, beingliquid par excellence, bears the highest liquidity premium andconsequently stands at the core of the structure of own rates. Thedifference between the liquidity premium attaching to anyparticular asset relative to money must be compensated by eitheran excess in the net yield q-c over money, by its expected rate ofappreciation a, or both. Again, investors may differ in theirestimates of both these terms, as they may differ in terms of their195