We consider observable restrictions on asset prices in an exchange economy with general preferences and endowments and an asset structure that may be incomplete. - Asset prices satisfy the martingale property with respect to a class of probability measures; however, generically, not with respect to the empirical measure. - Attainable assets are priced at their expected payoffs with a correction for covariance with a benchmark return. This benchmark is a complete description of attitudes towards risk in the asset market. There is a unique portfolio of marketed assets that yields the benchmark return. - For attainable assets, the Capital Asset Pricing Model holds with respect to the return of a portfolio of marketed assets that is essentially unique. - Under restrictive assumptions on the utility functions and the initial endowments of individuals and on the asset structure, the asset market is effectively complete, 2-fund separation obtains and all assets, not necessarily attainable, can be priced at their expected payoff with a correction for covariance with the benchmark return; also, the Capital Asset Pricing Model holds with respect to the return of the aggregate consumption portfolio. We also examine implications for the approximate pricing of nonattainable assets when the asset market is not effectively complete.
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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number
259.
Length: Date of creation: Sep 1989 Date of revision: Handle: RePEc:bon:bonsfa:259
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