TY - UNPB
T1 - Comparative statics of asset prices
T2 - the effects of other assets' risk
AU - Diasakos, Theodoros
N1 - Revision & Resubmission requested by the Review of Asset Pricing Studies (ISSN: 2045-9920)
PY - 2013/8
Y1 - 2013/8
N2 - Currently, financial economics is unable to predict changes in asset prices with respect to changes in the underlying risk factors, even when an asset's dividend is independent of a given factor. This paper takes steps towards addressing this issue by highlighting a crucial component of wealth effects on asset prices hitherto ignored by the literature. Changes in wealth do not only alter an agent's risk aversion, but also her perceived ``riskiness'' of a security. The latter enhances significantly the extent to which market-clearing leads to endogenously-generated correlation across asset prices, over and above that induced by correlation between payoffs, giving the appearance of ``contagion.''
AB - Currently, financial economics is unable to predict changes in asset prices with respect to changes in the underlying risk factors, even when an asset's dividend is independent of a given factor. This paper takes steps towards addressing this issue by highlighting a crucial component of wealth effects on asset prices hitherto ignored by the literature. Changes in wealth do not only alter an agent's risk aversion, but also her perceived ``riskiness'' of a security. The latter enhances significantly the extent to which market-clearing leads to endogenously-generated correlation across asset prices, over and above that induced by correlation between payoffs, giving the appearance of ``contagion.''
KW - General equilibrium asset-pricing
KW - Geometric Brownian motion
KW - Contagion
UR - http://ideas.repec.org/p/san/wpecon/1315.html
UR - http://works.bepress.com/diasakos/4/
M3 - Working paper
T3 - School of Economics & Finance Discussion Paper 1315
BT - Comparative statics of asset prices
PB - University of St Andrews
ER -