Incomplete Diversification and Asset Pricing

Dilip B. Madan, Frank Milne and Robert Elliott

No 865, Working Paper from Economics Department, Queen's University

Abstract: Investors in equilibrium are modeled as facing investor specific risk exposures arising from incomplete diversification of personal risks across the space of assets. Personalized asset pricing models reflect these risks. Averaging across the pool of investors we obtain a market asset pricing model that reflects market risk exposures. It is observed on invoking a law of large number applied to an infinite population of investors that many personally relevant risk considerations can be eliminated from the market asset pricing model. Examples illustrating the effects of undiversified labour income and taste specific price indices are provided. Suggestions for future work on asset pricing include a need to focus on identifying and explaining investor specific risk exposures.

Pages: 19 pages
Date: 1992-07
References: Add references at CitEc
Citations:

Downloads: (external link)
http://qed.econ.queensu.ca/working_papers/papers/qed_wp_865.pdf First version 1992 (application/pdf)

Related works:
Working Paper: Incomplete Diversification And Asset Pricing (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:865

Access Statistics for this paper

More papers in Working Paper from Economics Department, Queen's University Contact information at EDIRC.
Bibliographic data for series maintained by Mark Babcock (babcockm@queensu.ca).