Extraneous Risk: Pricing of Non-Systematic Risk

Ki Binh () and Hogyu Jhang ()
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Ki Binh: Department of Economics, Myongji University
Hogyu Jhang: Department of Finance, Scheller College of Business, Georgia Institute of Technology

Annals of Economics and Finance, 2015, vol. 16, issue 2, 335-352

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.

Keywords: Extraneous risk; Heterogeneous beliefs; General equilibrium (search for similar items in EconPapers)
JEL-codes: G00 G02 G10 G11 G12 (search for similar items in EconPapers)
Date: 2015
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