Asset pricing and the Covid-19 deposit glut: an application of Liquidity Preference Theory

May 7, 2025
Issue 2025-05

Summary

Strongly rising asset prices after March 2020 in the euro area and the United States are hard to explain using conventional asset pricing approaches. We apply Liquidity Preference Theory to examine the consequences of the unprecedented Covid-related growth of household deposits. Following the shock, deposits were spent, hoarded, or invested depending on liquidity preferences (Keynes, 1936; Tobin 1969). The allocation of the deposit shock was mediated by income distribution, corporate financial dynamics and the price inelastic response of financial and real estate asset markets, combined with the elasticity of the financial system (Borio and Disyatat 2011; Gabaix and Koijen 2022). Stability of liquidity preferences was evidenced by the fact that, just as before the pandemic, every additional Euro or Dollar in monetary wealth during the pandemic came to be reflected in around six Euros or ten Dollars in non-monetary wealth, mainly equities and housing. This suggests portfolio rebalancing is the major explanation of the strong rise in asset prices after the onset of the pandemic.

Download file now

The file can be downloaded with the button below.

Issue:
05
Pages:
32
JEL classification:
E42, E51, G11, G22, G21
Keywords:
Asset pricing, Deposits, Household savings, Macrofinance, Liquidity
Year:
2025

Author(s)

  • Dirk Bezemer

  • Richard Senner

Your settings

Required: These cookies (e.g. for storing your IP address) cannot be rejected as they are necessary to ensure the operation of the website. These data are not evaluated further.
Analytics: If you consent to this category, data such as IP address, location, device information, browser version and site visitor behaviour will be collected. These data are evaluated for the SNB's internal purposes and are kept for two years.
Third-party: If you consent to this category, third-party services (used, for example, to add social multimedia content to the SNB's website) will be activated which collect personal data, process these data, disclose them abroad - worldwide - and place cookies. The relevant data protection regulations are linked in the 'Privacy statement for the website of the Swiss National Bank'.

Choose your preferred settings:

This website uses cookies, analytics tools and other technologies to provide requested features, content and services, to personalise the content shown, to provide links to social media, and to analyse the use of the website in anonymised form for the purposes of improving usability. Personal data are also disclosed abroad - worldwide - to video service providers and the analytics tools of these providers are used. More information is available under 'Manage settings'.