Abstract

http://ssrn.com/abstract=2446873
 


 



Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims


Georgy Chabakauri


London School of Economics and Political Science

Kathy Yuan


London School of Economics - Department of Finance

Konstantinos E. Zachariadis


London School of Economics

June 2014


Abstract:     
We consider a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors, and noise traders. Informed investors privately observe an aggregate risk factor affecting the probabilities of different states of the economy. Uninformed investors attempt to extract that information from asset prices, but full revelation is prevented by noise traders. We relax the usual assumption of normally distributed asset payoffs and allow for assets with more general payoff distributions, including contingent claims, such as options and other derivatives. We show that assets reveal information about the risk factor only if they help span the exposure of probabilities of states to the risk factor. When the market is complete, we provide equilibrium asset prices and optimal portfolios of investors in closed form. In incomplete markets, we derive prices and portfolios in terms of easily computable inverse functions.

Number of Pages in PDF File: 45

Keywords: asymmetric information, rational expectations, learning from prices, contingent claims, derivative securities

JEL Classification: D82, G12, G14

working papers series


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Date posted: June 8, 2014 ; Last revised: June 29, 2014

Suggested Citation

Chabakauri, Georgy and Yuan, Kathy and Zachariadis, Konstantinos E., Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims (June 2014). Available at SSRN: http://ssrn.com/abstract=2446873

Contact Information

Georgy Chabakauri (Contact Author)
London School of Economics and Political Science ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
HOME PAGE: http://personal.lse.ac.uk/CHABAKAU/
Kathy Zhichao Yuan
London School of Economics - Department of Finance ( email )
Old Building
Houghton St
London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)
HOME PAGE: http://fmg.lse.ac.uk/~kathy
Konstantinos E. Zachariadis
London School of Economics ( email )
Houghton St
Department of Finance
London, WC2A 2AE
United Kingdom
+442079556541 (Phone)
+442078494647 (Fax)
HOME PAGE: http://www2.lse.ac.uk/finance/people/profiles/KostasZachariadis.aspx
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