Copyright (c) 2008 All rights reserved. http://works.bepress.com/diasakos Recent documents in Theodoros M. Diasakos en-us Tue, 12 Feb 2008 02:19:25 PST 3600 http://works.bepress.com/diasakos/3 http://works.bepress.com/diasakos/3 Sun, 10 Feb 2008 14:21:23 PST This is a study on the comparative statics of general equilibrium asset prices in a representative-agent model where securities are specified by their dividend processes - vector geometric Brownian motions with fixed factor loadings. As usual, equilibrium asset prices are conditional expectations of future dividends valued at the marginal utility of equilibrium consumption. I examine the comparative statics of the equilibrium prices of securities relative to the equilibrium price of a zero-coupon bond. I show that the inner product of the vector of factor loadings of the dividend of a security with the gradient vector (with respect to the current realization of the Brownian motion) of its equilibrium relative price is always non-negative. More precisely, it is positive unless all of the factor loadings are zero. Based on this result, I provide expressions for the comparative statics. They attest to the richness of the corresponding dynamics. In general, since changes in the components of the Brownian motion induce wealth effects, the equilibrium relative price of a security may vary with the current realization of a component of the Brownian vector, even when its dividend is independent of that component. My analysis uncovers a mechanism that has hitherto been ignored by the literature: the wealth effects do not operate only through changes in risk aversion but also via altering the ``riskiness'' of a security. Market-clearing leads to endogenously-generated correlation across asset prices and asset returns, over and above that induced by correlation between asset payoffs, giving the appearance of ``contagion''. I demonstrate that this obtains even under constant absolute risk aversion (in which case, the risk aversion channel of wealth effects leaves equilibrium relative prices unchanged). Theodoros Diasakos Finance