Comparative statics of asset prices : the effects of other assets' risk
Abstract
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.''
Citation
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 .
ISSN
0962-4031Type
Working or discussion paper
Rights
(c) 2013 the author
Description
Revision & Resubmission requested by the Review of Asset Pricing Studies (ISSN: 2045-9920)Collections
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