Moral-Hazard Premium

Takashi Misumi, 隆司 三隅, Hisashi Nakamura, 恒 中村, Koichiro Takaoka and 浩一郎 高岡

No G-1-7, Working Paper Series from Hitotsubashi University Center for Financial Research

Abstract: This paper provides an explicit asset-pricing formula in a continuous-time generalequilibrium exchange economy in the presence of moral hazard. Specifically, it solves an optimal consumption/wealth allocation problem of a representative lender in financial markets under regular market risk and rare-event risk when an endowment process is subject to a firm manager’s moral hazard. Consequently, it shows that, under the moral-hazard problem, a positive premium is stipulated on a riskless rate in market equilibrium – call it a moral-hazard premium – due to the necessity to give the manager an incentive to avoid his opportunistic misbehavior.

Keywords: moral hazard; asset prices; rare-event risk; regular market risk; riskless rate (search for similar items in EconPapers)
JEL-codes: D51 D82 G12 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-03-12
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hcfrwp:g-1-7

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