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Asset Trading and Valuation with Uncertain Exposure

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  • Hatchondo, Juan Carlos

    (Federal Reserve Bank of Richmond)

  • Krusell, Per

    (IIES)

  • Schneider, Martin

    (Stanford University)

Abstract

This paper considers an asset market where investors have private information not only about asset payoffs, but also about their own exposure to an aggregate risk factor. In equilibrium, rational investors disagree about asset payoffs: Those with higher exposure to the risk factor are (endogenously) more optimistic about claims on the risk factor. Thus, information asymmetry limits risk sharing and trading volumes. Moreover, uncertainty about exposure amplifies the effect of aggregate exposure on asset prices, and can thereby help explain the excess volatility of prices and the predictability of excess returns.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 14-5.

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Length: 62 pages
Date of creation: 02 Apr 2014
Date of revision:
Handle: RePEc:fip:fedrwp:14-05

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Keywords: Asset trading; Asset valuation;

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