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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/31419
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| Title: | Background Risk and Trading in a Full-Information Rational Expectations Economy |
| Authors: | Subrahmanyam, Marti G.
Stapleton, Richard C.
Zeng, Qi |
| Issue Date: | 9-Jan-2012 |
| Series/Report no.: | FIN-11-044 |
| Abstract: | In this paper, we assume that investors have the same information, but
trade due to the evolution of their non-market wealth. In our
formulation, investors rebalance their portfolios in response to changes
in their expected non-market wealth, and hence trade. We assume an
incomplete market in which risky non-market wealth is non-hedgeable and
independent of market risk, and thus represents an additive background
risk. Investors who experience positive shocks to their expected wealth
buy more stocks from those who experience less positive shocks. The
extent of trading depends on the heterogeneity of the shocks to the
expected background risk across the agents. The demands of the two
agents are convex or concave in the state of the economy, which
justifies trading in the aggregate assets and contingent claims. |
| URI: | http://hdl.handle.net/2451/31419 |
| Appears in Collections: | Finance Working Papers
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