Universal Bounds for Asset Prices in Heterogeneous Economies

15 Pages Posted: 25 Jul 2007

See all articles by Semyon Malamud

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Date Written: July 2007

Abstract

We establish universal bounds for asset prices in heterogeneous complete market economies with scale invariant preferences. Namely, for each agent in the economy we consider an artificial homogeneous economy, populated solely by this agent and calculate the homogeneous price of an asset in each of this economies. Dumas (1989) conjectured that the risk free rate in the heterogeneous economy must lie in the interval determined by the minimal and maximal of the homogeneous prices. We show that the answer depends on the risk aversions of the agents in the economy: the upper bound holds when all risk aversions are smaller than one and the lower bound holds when all risk aversions are larger than one. The bounds almost never hold simultaneously. Furthermore, we prove these bounds for arbitrary assets.

Keywords: heterogeneity, asset prices, yield curve, bounds

JEL Classification: D91, E43, G12

Suggested Citation

Malamud, Semyon, Universal Bounds for Asset Prices in Heterogeneous Economies (July 2007). Available at SSRN: https://ssrn.com/abstract=1002854 or http://dx.doi.org/10.2139/ssrn.1002854

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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