A Short Note on Expected Risk Adjusted Return Elasticity and Consumer Theory
Serie Documentos de Trabajo - Nro. 558
21 Pages Posted: 23 Dec 2014
Date Written: December 2014
This short note is aimed to open discussion. Asset pricing models assume capital markets are competitive, but then my questions were: Why would a diversified investor be willing to accept a supposedly lower equilibrium risk adjusted rate of return in emerging markets (like Argentina), that the one sought from a foreign investor, being both comfortable with it? The second: Do the sale of securities and finance in general benefit from, applying concepts and tools borrowed from consumer theory and particularly demand theory? Finally: May companies benefit from some sort of market power when selling risk to investors in the form of securities (particularly shares), in the same way they may benefit from holding market power for their products and services?
The purpose of this short note is to share debate about the assumption of competitive markets in the determination of the equilibrium risk adjusted rate of return, which could become more interesting in emerging markets where lack of depth of capital markets, lack of information and lack of sophistication are more plausible to find giving rise to the possibility of sort of market power in the sale of risk, and to perhaps introduce some points of contact between the consumer theory - particularly demand and marketing (which holds for consumption of current products and services), to securities (particularly in this note herein shares) which are no more than packed rights for future consumption. However, concepts may apply to developed capital markets where companies want to promote not only their products and services, but also their shares.
Keywords: Asset valuation, rate of return, competitive markets, price elasticity, consumer theory
JEL Classification: F36, G11 G12
Suggested Citation: Suggested Citation