Asset Trading and Valuation with Uncertain Exposure

Juan Hatchondo, Per Krusell and Martin Schneider

No 14-5, Working Paper from Federal Reserve Bank of Richmond

Abstract: This paper considers an asset market where investors have private information not only about asset payoffs, but also about their own exposure to an aggregate risk factor. In equilibrium, rational investors disagree about asset payoffs: Those with higher exposure to the risk factor are (endogenously) more optimistic about claims on the risk factor. Thus, information asymmetry limits risk sharing and trading volumes. Moreover, uncertainty about exposure amplifies the effect of aggregate exposure on asset prices, and can thereby help explain the excess volatility of prices and the predictability of excess returns.

Keywords: Asset trading; Asset valuation (search for similar items in EconPapers)
Pages: 62 pages
Date: 2014-04-02
New Economics Papers: this item is included in nep-cta, nep-dge and nep-ifn
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