Other Assets' Risk: Asset-Prices and Perceptions of Asset-Risk

Theodoros Diasakos

No 210, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: Due to wealth effects, the price of a security may vary with the realization of an underlying risk factor even when the security's dividend is independent of that factor. This paper highlights a crucial component of these effects hitherto ignored by the literature: changes in wealth do not alter only an agent's risk aversion, but also her perceived "riskiness" of the security. The latter enhances significantly the extent to which market-clearing leads to endogenously-generated correlation across asset prices and returns, over and above that induced by correlation between payoffs, giving the appearance of "contagion".

Keywords: General Equilibrium Asset-Pricing; Lucas Trees; Contagion (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:210

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