Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/88725
Authors: 
Branger, Nicole
Kraft, Holger
Meinerding, Christoph
Year of Publication: 
2013
Series/Report no.: 
SAFE Working Paper Series 11
Abstract: 
This paper analyzes the equilibrium pricing implications of contagion risk in a Lucastree economy with recursive preferences and jumps. We introduce a new economic channel allowing for the possibility that endowment shocks simultaneously trigger a regime shift to a bad economic state. We document that these contagious jumps have far-reaching asset pricing implications. The risk premium for such shocks is superadditive, i.e. it is 2.5% larger than the sum of the risk premia for pure endowment shocks and regime switches. Moreover, contagion risk reduces the risk-free rate by around 0.5%. We also derive semiclosed-form solutions for the wealth-consumption ratio and the price-dividend ratios in an economy with two Lucas trees and analyze cross-sectional effects of contagion risk qualitatively. We find that heterogeneity among the assets with respect to contagion risk can increase risk premia disproportionately. In particular, big assets with a large exposure to contagious shocks carry significantly higher risk premia.
Subjects: 
Contagion
General Equilibrium
Asset Pricing
Recursive Preferences
JEL: 
G01
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
968.44 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.