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Incomplete Information in a Long Run Risks Model of Asset Pricing

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  • Prasad V. Bidarkota

    ()
    (Department of Economics, Florida International University)

Abstract

We study the effects of incorporating incomplete information in the recently developed long run risks model of asset pricing. Studying the effects of incomplete information in such a setting is tractable, especially in the homoskedastic case with no fluctuating economic uncertainty. The incomplete information model is solved using approximate analytical methods as in the complete information framework analyzed in the literature. Model implications on moments of endogenous variables of interest including rates of return are compared in the long run risks model with and without incomplete information.

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File URL: http://casgroup.fiu.edu/pages/docs/2249/1275227517_08-02.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Florida International University, Department of Economics in its series Working Papers with number 0802.

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Length: 18 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:fiu:wpaper:0802

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Postal: Miami, FL 33199
Phone: (305) 348-2316
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Web page: http://casgroup.fiu.edu/Economics/
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Keywords: asset pricing; long run risks; incomplete information; Kalman filter; equity returns; riskfree returns;

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  1. Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
  2. Gennotte, Gerard, 1986. " Optimal Portfolio Choice under Incomplete Information," Journal of Finance, American Finance Association, vol. 41(3), pages 733-46, July.
  3. David, Alexander, 1997. "Fluctuating Confidence in Stock Markets: Implications for Returns and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(04), pages 427-462, December.
  4. Dothan, Michael U & Feldman, David, 1986. " Equilibrium Interest Rates and Multiperiod Bonds in a Partially Observable Economy," Journal of Finance, American Finance Association, vol. 41(2), pages 369-82, June.
  5. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
  6. Brennan, Michael J. & Xia, Yihong, 2001. "Stock price volatility and equity premium," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 249-283, April.
  7. Ravi Bansal, 2007. "Long-run risks and financial markets," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 283-300.
  8. Detemple, Jerome B., 1991. "Further results on asset pricing with incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 15(3), pages 425-453, July.
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