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Unpublished Paper
Comparative Statics of Asset Prices: The Effects of Other Assets' Risk
(2012)
  • Theodoros Diasakos
Abstract

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.''

Disciplines
Publication Date
July, 2012
Citation Information
Theodoros Diasakos. "Comparative Statics of Asset Prices: The Effects of Other Assets' Risk" (2012)
Available at: http://works.bepress.com/diasakos/4/