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Extraneous Risk: Pricing of Non-Systematic Risk

Author

Listed:
  • Ki Beom Binh

    (Department of Economics, Myongji University)

  • Hogyu Jhang

    (Department of Finance, Scheller College of Business, Georgia Institute of Technology)

Abstract

We study a simple equilibrium model where aggregate stock market quantity can be affected by non-systematic risk. In the model, investors perceive the growth rate of the aggregate dividend differently. Further, they are confused between the aggregate risk and the extraneous risk so that they form different expectations about the dividend growth rate through extraneous risk. As a result, extraneous risk affects aggregate equilibrium quantities. We derive equilibrium quantities and investigate how an extraneous risk priced via investors' different beliefs can affect the equilibrium at the aggregate level. The model provides a pricing of non-systematic risk in equilibrium without assuming an incomplete financial market or an under diversification.

Suggested Citation

  • Ki Beom Binh & Hogyu Jhang, 2015. "Extraneous Risk: Pricing of Non-Systematic Risk," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 335-352, November.
    • Handle: RePEc:cuf:journl:y:2015:v:16:i:2:binh
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    References listed on IDEAS

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    More about this item

    Keywords

    Extraneous risk; Heterogeneous beliefs; General equilibrium;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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