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Journal Articles European Economic Review Year : 2018

A Class of Tractable Incomplete-Market Models for Studying Asset Returns and Risk Exposure

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Abstract

We present a class of tractable incomplete-market models, where agents face both aggregate risk and limited participation in financial markets. Tractability relies on the assumptions of small asset volumes and of a period utility function that is linear beyond a threshold, in line with Fishburn’s (1977) contribution in decision theory. We prove the existence of an equilibrium and derive theoretical results regarding asset prices and consumption choices. This small-trade model is able to reproduce a low safe return and a high equity premium, together with a realistic representation of household exposure to both idiosyncratic and aggregate risks.
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Dates and versions

hal-03949545 , version 1 (20-01-2023)

Licence

Attribution - NonCommercial - NoDerivatives - CC BY 4.0

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Cite

François Le Grand, Xavier Ragot. A Class of Tractable Incomplete-Market Models for Studying Asset Returns and Risk Exposure. European Economic Review, 2018, 103, pp.39-59. ⟨10.1016/j.euroecorev.2018.01.003⟩. ⟨hal-03949545⟩
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