Consider a risky asset i in a one-period setting. Assume all individuals have time-additive expected utility. (a)
Question:
Consider a risky asset i in a one-period setting. Assume all individuals have time-additive expected utility.
(a) Explain why the price of asset i and the consumption of individual l are related as follows:
It is technically complicated to include transaction costs and trading restrictions in asset pricing models, but a study of He and Modest (1995) indicates that such imperfections can at least in part explain the equity premium puzzle.
Pi = E[Di]
Rf + e −δl Cov Di, u
l (cl )
u
l (cl 0)
.
(b) Show the approximate relation Pi ≈ E[Di]
Rf − e −δl ARAl(c l 0) Cov
Di,c l
.
(c) Show that the price of asset i and aggregate consumption C = L l=1 cl satisfy the approximation Pi ≈ E[Di]
Rf −
⎛
⎝
L l=1 1 e−δl ARAl(cl 0)
⎞
⎠
−1 Cov [Di, C].
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Question Posted: