A Class of Tractable Incomplete-Market Models for Studying Asset Returns and Risk Exposure

François Le Grand and Xavier Ragot
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François Le Grand: EM - EMLyon Business School, D-ERDW - Departement Erdwissenschaften [ETH Zürich] - ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]

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Abstract: We present a class of tractable incomplete-market models, where agents face both aggregate risk and limited participation in financial markets. Tractability relies on the assumptions of small asset volumes and of a period utility function that is linear beyond a threshold, in line with Fishburn's (1977) contribution in decision theory. We prove the existence of an equilibrium and derive theoretical results regarding asset prices and consumption choices. This small-trade model is able to reproduce a low safe return and a high equity premium, together with a realistic representation of household exposure to both idiosyncratic and aggregate risks.

Keywords: Incomplete markets; Risk sharing; Consumption inequalities (search for similar items in EconPapers)
Date: 2018-04
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Published in European Economic Review, 2018, 103, pp.39-59. ⟨10.1016/j.euroecorev.2018.01.003⟩

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Journal Article: A class of tractable incomplete-market models for studying asset returns and risk exposure (2018)
Working Paper: A class of tractable incomplete-market models for studying asset returns and risk exposure (2018)
Working Paper: A Class of Tractable Incomplete-Market Models for Studying Asset Returns and Risk Exposure (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03949545

DOI: 10.1016/j.euroecorev.2018.01.003

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