SFB 303 Discussion Paper No. A - 259
Author: Dutta, J., and H.M. Polemarchakis
Title: Asset Pricing and Observability
Abstract: We consider observable restrictions on asset prices in an exchange
economy with general preferences and endowments and an asset structure that
may be incomplete.
- Asset prices satisfy the martingale property with respect to a class of
probability measures; however, generically, not with respect to the empirical
- Attainable assets are priced at their expected payoffs with a correction
for covariance with a benchmark return. This benchmark is a complete
description of attitudes towards risk in the asset market. There is a
unique portfolio of marketed assets that yields the benchmark return.
- For attainable assets, the Capital Asset Pricing Model holds with respect
to the return of a portfolio of marketed assets that is essentially unique.
- Under restrictive assumptions on the utility functions and the initial
endowments of individuals and on the asset structure, the asset market is
effectively complete, 2-fund separation obtains and all assets, not
necessarily attainable, can be priced at their expected payoff with a
correction for covariance with the benchmark return; also, the Capital
Asset Pricing Model holds with respect to the return of the aggregate
We also examine implications for the approximate pricing of nonattainable
assets when the asset market is not effectively complete.
Creation-Date: September 1989
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