The effects of incomplete insurance markets and trading costs in a consumption-based asset pricing model

Article Abstract:

A model describing incomplete financial markets with undiversifiable idiosyncratic shocks was developed to evaluate asset pricing problems. The model assumes that market agents with aggregate and individual uncertainties serve limited securities markets. Transactions costs, borrowing constraints and short sales constraints restrict trade. Under these conditions, the risk-free rate and risk premium exhibit opposite reactions relative to complete markets.

Capital market, Capital markets

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The equity premium and the allocation of income risk

Article Abstract:

A study was done to analyze the relationship between the equity premium and the allocation of income risk. The study assigns a disproportionate share of output uncertainty for stockholders and supports risk reallocation by borrowing restrictions. The risk shifting mechanism presented generates an increase in equity premium. However, findings do not generate vital financial statistics or conclusions on the variability of equity return.

Analysis, Risk (Insurance)

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Market risk and asset prices

Article Abstract:

The presence of market risk causes market prices to fluctuate, partly because of demand but also because of increased sensitivity to the price changes. Also, risk usually indicates positive premiums for those who ride it out, as buyers will expect gains and sellers will expect losses. This study uses stochastic shifts in demand to examine the effects of risk upon trading behavior.

Noncommercial research organizations, Research, Risk (Economics), Prices

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