Other Assets' Risk: Asset-Prices and Perceptions of Asset-Risk
AbstractDue to wealth effects, the price of a security may vary with the realization of an underlying risk factor even when the security's dividend is independent of that factor. This paper highlights a crucial component of these effects hitherto ignored by the literature: changes in wealth do not alter only an agent's risk aversion, but also her perceived "riskiness" of the security. The latter enhances significantly the extent to which market-clearing leads to endogenously-generated correlation across asset prices and returns, over and above that induced by correlation between payoffs, giving the appearance of "contagion".
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 210.
Length: 73 pages
Date of creation: 2011
Date of revision:
General Equilibrium Asset-Pricing; Lucas Trees; Contagion;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-11 (All new papers)
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