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Other Assets' Risk: Asset-Prices and Perceptions of Asset-Risk

Author

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  • Theodoros M. Diasakos

Abstract

Due 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".

Suggested Citation

  • Theodoros M. Diasakos, 2011. "Other Assets' Risk: Asset-Prices and Perceptions of Asset-Risk," Carlo Alberto Notebooks 210, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:210
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    File URL: https://www.carloalberto.org/wp-content/uploads/2018/11/no.210.pdf
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    More about this item

    Keywords

    General Equilibrium Asset-Pricing; Lucas Trees; Contagion;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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