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Aggregate implications of micro asset market segmentation

Listed author(s):
  • Edmond, Chris
  • Weill, Pierre-Olivier

An extensive empirical literature finds that micro asset markets are segmented from one another. We develop a consumption-based asset pricing model to quantify the aggregate implications of a financial system comprised of many such segmented micro asset markets. We specify exogenously the level of segmentation that determines how much idiosyncratic risk traders bear in their micro market and calibrate the segmentation to match facts about systematic and idiosyncratic return volatility. In our benchmark model traders bear 30% of their idiosyncratic risk, the unconditional aggregate equity premium is 2.4% annual, and the welfare costs of segmentation are substantial, 1.8% of lifetime consumption.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304393212000402
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 4 ()
Pages: 319-335

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Handle: RePEc:eee:moneco:v:59:y:2012:i:4:p:319-335
DOI: 10.1016/j.jmoneco.2012.03.006
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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