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Asset Trading and Valuation with Uncertain Exposure

Author

Listed:
  • Juan Carlos Hatchondo
  • Per Krusell
  • Martin Schneider

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.

Suggested Citation

  • Juan Carlos Hatchondo & Per Krusell & Martin Schneider, 2014. "Asset Trading and Valuation with Uncertain Exposure," Working Paper 14-5, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:14-05
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    References listed on IDEAS

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