Asset Pricing with Incomplete Information In a Discrete Time Pure Exchange Economy
AbstractWe study the consumption based asset pricing model in a discrete time pure exchange setting with incomplete information. Incomplete information leads to a filtering problem which agents solve using the Kalman filter. We characterize the solution to the asset pricing problem in such a setting. Empirical estimation with US consumption data indicates strong statistical support for the incomplete information model versus the benchmark complete information model. We investigate the ability of the model to replicate some key stylized facts about US equity and riskfree returns.
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Bibliographic InfoPaper provided by Florida International University, Department of Economics in its series Working Papers with number 0603.
Length: 29 pages
Date of creation: May 2006
Date of revision:
asset pricing; incomplete information; Kalman filter; equity returns; riskfree returns;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-27 (All new papers)
- NEP-CFN-2006-05-27 (Corporate Finance)
- NEP-FIN-2006-05-27 (Finance)
- NEP-FMK-2006-05-27 (Financial Markets)
- NEP-MAC-2006-05-27 (Macroeconomics)
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