Consumption correlatedness and risk measurement in economies with non-traded assets and heterogeneous information |
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Authors: | Sanford J. Grossman Robert J. Shiller |
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Affiliation: | University of Chicago, Chicago, IL 60637, USA;Yale University, New Haven, CT 06520, USA |
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Abstract: | A technique is presented for deriving equilibrium models of asset risk premia in continuous time models which does not require the complete solution of a consumer's continuous time stochastic control problem. The technique is used to show that even if traders have heterogeneous information about asset returns and/or there are non-traded assets, then the risk premium of a traded asset is determined by the covariance between the asset's return and the rate of change in per capita consumption. We only require the assumption that traders' consumptions and traded asset values form an Ito process. |
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