Chabakauri, Georgy 
ORCID: 0009-0002-7980-269X, Yuan, Kathy ORCID: 0000-0001-9895-7545 and Zachariadis, Konstantinos
(2014)
Multi-asset noisy rational expectations equilibrium with contingent claims.
Working papers.
Social Science Research Network (SSRN), Rochester, USA.
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Abstract
We consider a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors, and noise traders. Informed investors privately observe an aggregate risk factor affecting the probabilities of different states of the economy. Uninformed investors attempt to extract that information from asset prices, but full revelation is prevented by noise traders. We relax the usual assumption of normally distributed asset payoffs and allow for assets with more general payoff distributions, including contingent claims, such as options and other derivatives. We show that assets reveal information about the risk factor only if they help span the exposure of probabilities of states to the risk factor. When the market is complete, we provide equilibrium asset prices and optimal portfolios of investors in closed form. In incomplete markets, we derive prices and portfolios in terms of easily computable inverse functions.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Official URL: | http://www.ssrn.com/ |
| Additional Information: | © 2014 The Authors |
| Divisions: | Finance Financial Markets Group |
| Subjects: | H Social Sciences > HG Finance |
| JEL classification: | D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies |
| Date Deposited: | 14 Jan 2015 12:35 |
| Last Modified: | 11 Dec 2024 19:16 |
| Funders: | Paul Woolley Centre, LSE |
| URI: | http://eprints.lse.ac.uk/id/eprint/60736 |
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