Pricing two trees when mildew infests the orchard: how does contagion affect general equilibrium asset prices : [version: March 11, 2011]

This paper analyzes the equilibrium pricing implications of contagion risk in a two-tree Lucas economy with CRRA preferences. The dividends of both trees are subject to downward jumps. Some of these jumps are contagious 
This paper analyzes the equilibrium pricing implications of contagion risk in a two-tree Lucas economy with CRRA preferences. The dividends of both trees are subject to downward jumps. Some of these jumps are contagious and increase the risk of subsequent jumps in both trees for some time interval. We show that contagion risk leads to large price-dividend ratios for small assets, a joint movement of prices in the case of a regime change from the calm to the contagion state, significantly positive correlations between assets, and large positive betas for small assets. Whereas disparities between the assets with respect to their propensity to trigger contagion barely matter for pricing, the prices of robust assets that are hardly affected by contagion and excitable assets that are severely hit by contagion differ significantly. Both in absolute terms and relatively to the market, the price of a small safe haven increases if the economy reaches the contagion state. On the contrary, the price of a small, contagion-sensitive asset exhibits a pronounced downward jump.
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Metadaten
Author:Nicole Branger, Holger Kraft, Christoph Meinerding
URN:urn:nbn:de:hebis:30:3-347010
URL:http://www.ecb.europa.eu/events/pdf/conferences/ws_asset/sess1/Branger-Kraft-Meinerding.pdf
Document Type:Report
Language:English
Year of Completion:2011
Year of first Publication:2011
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2014/08/12
Tag:Asset Pricing; Contagion; General Equilibrium
Issue:version: March 11, 2011
Pagenumber:50
Last Page:49
HeBIS PPN:347238254
Institutes:Wirtschaftswissenschaften
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:G01 Financial Crises (Updated!)
G12 Asset Pricing; Trading volume; Bond Interest Rates
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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