In this paper, we examine an exchange economy with a financial market composed of three assets: a share of a stock, an European call option written on the stock, and a riskless bond. The financial market is assumed to be incomplete and the option is not a redundant asset. In such a case the...

In this paper, we propose a heterogeneous interacting agent model of a sequential monetary production economy. We use a basic dynamic flow model in an interacting agent context. The economy is assumed to be closed. There are three classes of agents: a single homogeneous representative consumer,...

This paper investigates the importance of market incompleteness by comparing the rates of risk aversion estimated from complete and incomplete markets environments. For the incomplete-markets case, we use consumption data for 50 U.S. states. While the use of state-level data is conceptually...

We investigate portfolio allocations and asset returns within a stochastic OLG economy with risky equity, generation-wide labor income shocks and portfolio nonnegativity constraints. Our model assumes a difference stationary endowment process, a young generation that faces labor income...

Risk premia in the consumption capital asset pricing model depend on preferences and dividend. We develop a decomposition which allows a separate treatment of both components. We show that preferences alone determine the risk-return tradeoff measured by the Sharpe-ratio. In general, the...

Using a simple dynamic consumption-based asset pricing model, this paper explores the implications of a representative investor with smooth ambiguity averse preferences [Klibano¤, Marinacci and Mukerji, Econometrica (2005)] and provides a comparative analysis of risk aversion and ambiguity...