Sharing idiosyncratic risk even though prices are “wrong”
We design an infinite-horizon dynamic asset market experiment with perishable consumption and a long-lived asset where gains from trade originate from individuals experiencing idiosyncratic income shocks. Our study is based on the consumption-based general equilibrium theory (Lucas (1978)). The pres...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2022
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| Subjects: | |
| Online Access: | https://hdl.handle.net/10356/163938 |
| _version_ | 1826130137431670784 |
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| author | Halim, Edward Riyanto, Yohanes Eko Roy, Nilanjan |
| author2 | School of Social Sciences |
| author_facet | School of Social Sciences Halim, Edward Riyanto, Yohanes Eko Roy, Nilanjan |
| author_sort | Halim, Edward |
| collection | NTU |
| description | We design an infinite-horizon dynamic asset market experiment with perishable consumption and a long-lived asset where gains from trade originate from individuals experiencing idiosyncratic income shocks. Our study is based on the consumption-based general equilibrium theory (Lucas (1978)). The presence of traders having induced motive to smooth consumption is not sufficient to eliminate price bubbles. Despite the asset being consistently priced higher than the equilibrium price, traders are able to share idiosyncratic risk and attain higher welfare. The co-existence of traders with income shocks along with those having no induced motive to trade does not hinder in the former smoothing their consumption stream. Our results hold for markets with and without aggregate risk. |
| first_indexed | 2024-10-01T07:51:56Z |
| format | Journal Article |
| id | ntu-10356/163938 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T07:51:56Z |
| publishDate | 2022 |
| record_format | dspace |
| spelling | ntu-10356/1639382022-12-22T07:43:50Z Sharing idiosyncratic risk even though prices are “wrong” Halim, Edward Riyanto, Yohanes Eko Roy, Nilanjan School of Social Sciences Social sciences::Economic theory Aggregate Risk Idiosyncratic Risk We design an infinite-horizon dynamic asset market experiment with perishable consumption and a long-lived asset where gains from trade originate from individuals experiencing idiosyncratic income shocks. Our study is based on the consumption-based general equilibrium theory (Lucas (1978)). The presence of traders having induced motive to smooth consumption is not sufficient to eliminate price bubbles. Despite the asset being consistently priced higher than the equilibrium price, traders are able to share idiosyncratic risk and attain higher welfare. The co-existence of traders with income shocks along with those having no induced motive to trade does not hinder in the former smoothing their consumption stream. Our results hold for markets with and without aggregate risk. Nanyang Technological University We acknowledge the financial support from the General Research Fund sponsored by the Hong Kong RGC (CityU 11500019), and the Nanyang Technological University, Singapore (MOE AcRF Tier 1 M4012114.SS0). 2022-12-22T07:43:50Z 2022-12-22T07:43:50Z 2022 Journal Article Halim, E., Riyanto, Y. E. & Roy, N. (2022). Sharing idiosyncratic risk even though prices are “wrong”. Journal of Economic Theory, 200, 105400-. https://dx.doi.org/10.1016/j.jet.2021.105400 0022-0531 https://hdl.handle.net/10356/163938 10.1016/j.jet.2021.105400 2-s2.0-85121659256 200 105400 en MOE AcRF Tier 1 M4012114.SS0 Journal of Economic Theory © 2021 Elsevier Inc. All rights reserved. |
| spellingShingle | Social sciences::Economic theory Aggregate Risk Idiosyncratic Risk Halim, Edward Riyanto, Yohanes Eko Roy, Nilanjan Sharing idiosyncratic risk even though prices are “wrong” |
| title | Sharing idiosyncratic risk even though prices are “wrong” |
| title_full | Sharing idiosyncratic risk even though prices are “wrong” |
| title_fullStr | Sharing idiosyncratic risk even though prices are “wrong” |
| title_full_unstemmed | Sharing idiosyncratic risk even though prices are “wrong” |
| title_short | Sharing idiosyncratic risk even though prices are “wrong” |
| title_sort | sharing idiosyncratic risk even though prices are wrong |
| topic | Social sciences::Economic theory Aggregate Risk Idiosyncratic Risk |
| url | https://hdl.handle.net/10356/163938 |
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