Comparative Statics of Asset Prices: the effect of other assets' risk

Theodoros Diasakos

No 2013-94, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: 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 agents 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.'

Keywords: General Equilibrium Asset-Pricing; Geometric Brownian Motion; Contagion (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:511

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