Aggregate Implications of Micro Asset Market Segmentation

Chris Edmond and Pierre-Olivier Weill

No 1117, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper develops a consumption-based asset pricing model to explain and quantify the aggregate implications of a frictional financial system, comprised of many financial markets partially integrated with one another. Each of our micro financial market's is inhabited by traders who are specialized in that markets type of asset. We specify exogenously the level of segmentation that ultimately determines how much idiosyncratic risk traders bear in their micro market and derive aggregate asset pricing implications. We pick segmentation parameters to match facts about systematic and idiosyncratic return volatility. We find that if the same level of segmentation prevails in every market, traders bear 30% of their idiosyncratic risk. With otherwise standard parameters, this benchmark model delivers an unconditional equity premium of 2.4% annual. We further disaggregate the model by allowing the level of segmentation to differ across markets. This version of the model delivers the same aggregate asset pricing implications but with only one-third the amount of segmentation: on average traders bear 10% of their idiosyncratic risk.

Keywords: Asset pricing; market segmentation; idiosyncratic risk (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2011
New Economics Papers: this item is included in nep-bec and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Aggregate implications of micro asset market segmentation (2012)
Working Paper: Aggregate Implications of Micro Asset Market Segmentation (2009)
Working Paper: Aggregate implications of micro asset market segmentation (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:1117

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