Comparative statics of asset prices : the effects of other assets' risk
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Currently, financial economics is unable to predict changes in asset prices with respect to changes in the underlying risk factors, even when an asset's dividend is independent of a given factor. This paper takes steps towards addressing this issue by highlighting a crucial component of wealth effects on asset prices hitherto ignored by the literature. Changes in wealth do not only alter an agent's risk aversion, but also her perceived ``riskiness'' of a security. The latter enhances significantly the extent to which market-clearing leads to endogenously-generated correlation across asset prices, over and above that induced by correlation between payoffs, giving the appearance of ``contagion.''
Diasakos , T 2013 ' Comparative statics of asset prices : the effects of other assets' risk ' School of Economics & Finance Discussion Paper 1315 , no. 1315 , University of St Andrews .
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(c) 2013 the author
Revision & Resubmission requested by the Review of Asset Pricing Studies (ISSN: 2045-9920)
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