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Unpublished Paper
Comparative Statics of Asset Prices: The Effects of Other Assets' Risk
  • Theodoros Diasakos

Currently, financial economics is unable to predict changes in asset prices with respect to changes in the underlying risk factors, even when an asset's dividend is independent of a given factor. This paper takes steps towards addressing this issue by highlighting a crucial component of wealth effects on asset prices hitherto ignored by the literature. Changes in wealth do not only alter an agent's risk aversion, but also her perceived ``riskiness'' of a security. The latter enhances significantly the extent to which market-clearing leads to endogenously-generated correlation across asset prices, over and above that induced by correlation between payoffs, giving the appearance of ``contagion.''

Publication Date
July, 2012
Citation Information
Theodoros Diasakos. "Comparative Statics of Asset Prices: The Effects of Other Assets' Risk" (2012)
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