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Title: Sharing idiosyncratic risk even though prices are “wrong”
Authors: Halim, Edward
Riyanto, Yohanes Eko
Roy, Nilanjan
Keywords: Social sciences::Economic theory
Issue Date: 2022
Source: Halim, E., Riyanto, Y. E. & Roy, N. (2022). Sharing idiosyncratic risk even though prices are “wrong”. Journal of Economic Theory, 200, 105400-.
Project: MOE AcRF Tier 1 M4012114.SS0
Journal: Journal of Economic Theory
Abstract: 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.
ISSN: 0022-0531
DOI: 10.1016/j.jet.2021.105400
Schools: School of Social Sciences 
Rights: © 2021 Elsevier Inc. All rights reserved.
Fulltext Permission: none
Fulltext Availability: No Fulltext
Appears in Collections:SSS Journal Articles

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