9th Symposium on
Finance, Banking, and Insurance
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Christian Gollier* |
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*University of
Toulouse |
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We examine asset prices in a representative-agent model of generalequilibrium. Assuming only that individuals are risk averse, we determineconditions on the changes in asset risk that are both necessary andsufficient for the asset price to fall. We show that these conditionsneither imply, nor are implied by the conditions for second-degreestochastic dominance. For example, if the payoff on an asset becomesriskier in the sense of second-degree stochastic dominance, the equilibriumprice of the asset need not necessarily fall. We further demonstrate how ourresults can be imbedded into a market that is incomplete in the sense ofcontaining an uninsurable background risk, such as a risk on labor income.We extend our model to show how a miscalibration of the asset risk can leadto a partial explanation of high equity premia (i.e., the "equity premiumpuzzle"). |
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