ASSET PRICING WITH INCOMPLETE INFORMATION IN A DISCRETE-TIME PURE EXCHANGE ECONOMY Cover Image

ASSET PRICING WITH INCOMPLETE INFORMATION IN A DISCRETE-TIME PURE EXCHANGE ECONOMY
ASSET PRICING WITH INCOMPLETE INFORMATION IN A DISCRETE-TIME PURE EXCHANGE ECONOMY

Author(s): Brice Dupoyet, Prasad Bidarkota
Subject(s): Economy
Published by: Reprograph
Keywords: asset pricing; incomplete information; Kalman filter; equity returns; risk free returns

Summary/Abstract: We study the consumption based asset pricing model in a discrete-time pure exchange setting with incomplete information. Incomplete information leads to a filtering problem which agents solve using the Kalman filter. We characterize the solution to the asset pricing problem in such a setting. Empirical estimation with US consumption data indicates strong statistical support for the incomplete information model versus the benchmark complete information model. We investigate the ability of the model to replicate some key stylized facts about US equity and risk-free returns.

  • Issue Year: III/2011
  • Issue No: 05
  • Page Range: 9-26
  • Page Count: 18
  • Language: English
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