New insights from the derivation of the rationality of the requirement of a pricing martingale from `native' principles of asset pricing (Obrimah 2023): Simulation Supplement

Abstract

This supplement provides simulation evidence that the predictions in Theorems 4 and 5 of Obrimah (2023) are robust. In stated respect, with off-equilibrium states necessarily riskier than equilibrium states, the simulations corroborate the prediction that the systemic risk premiums that are the sources of asset valuations are concave in systemic risk in the equilibrium states and strictly convex in systemic risk in the off-equilibrium states.

Keywords: Minimum Variance Assets, Idiosyncratic Risk, Unhedged Cash Flow Risk, Pricing Martingale, Discount Rates, Portfolio Theory, Risk Premiums, Risk Seeking Preferences, Global Risk Aversion

JEL Classification: G11, D81, D83, D84