Incomplete Diversification and Asset Pricing
Investors in equilibrium are modeled as facing investor specific risks across the space of assets. Personalized asset pricing models reflect these risks. Averaging across the pool of investors we obtain a market asset pricing model that reflects market risk exposures. It is observed on invoking a law of large numbers applied to an infinite population of investors, that many personally relevant risk considerations can be eliminated from the market asset pricing model. Examples illustrating the effects of undiversified labor income and taste specific price indices are provided. Suggestions for future work on asset pricing include a need to focus on identifying and explaining investor specific risk exposures.
|Date of creation:||Feb 2002|
|Publication status:||Published in K. Sandmann and Philipp Schonbucher (eds.) Advances in Finance and Statistics, Springer, Berlin, 2002.|
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- Connor, Gregory, 1984. "A unified beta pricing theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 13-31, October.
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