On the Range of the Risk-Free Interest Rate in Incomplete Markets

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On the Range of the Risk-Free Interest Rate in Incomplete Markets

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Kajii, A.
Hara, C.

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Atsushi Kajii

Abstract

In a model of a two-period exchange economy under uncertainty, we find both upper and lower bounds for the risk free interest rate when the agents’ utility function exhibit constant absolute risk aversion. These bounds are independent of the degree of market incompleteness, and so these results show to what extent market incompleteness can explain the risk-free rate puzzle in this class of general equilibrium models with heterogeneous agents. A general method of finding bounds without the assumption of constant absolute risk aversion is also presented.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0030.

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Date of creation: Dec 2000
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Handle: RePEc:cam:camdae:0030

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Paper
- Atsushi Kajii & Chiaki Hara, 2003. "On the Range of the Risk-Free Interest Rate in Incomplete Markets," Levine's Bibliography 666156000000000383, UCLA Department of Economics. [Downloadable!]
- Chiaki Hara & Atsushi Kajii, 2003. "On the Range of the Risk-Free Interest Rate in Incomplete Markets," Working Papers 577, Kyoto University, Institute of Economic Research. [Downloadable!]

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Other versions:
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