Information Costs and the Economics of Asset Pricing

Více o knize

All investors bear information costs. Each portfolio contains a limited number of securities, which occurs at the point where the gain from diversifying to one more security just offsets the loss from spreading information costs over an additional security. The securities in the portfolio chosen by the investor are all of identical riskiness, with investors sorting to securities of their individual desired level of riskiness. A stability condition governs the shape of the market risk-return relation derived from the foregoing portfolio theory. The first derivative of the risk-return relation is positive and declining. The portfolio theory is used to derive the condition that the second derivative is the ratio of the density of security supply to the density of security demand at each level of riskiness and ensures that incremental demand equals incremental supply at each level of riskiness. A preliminary estimate of the risk-return relation is estimated using historical U.S. data. It gives common sense results consistent with the functional form suggested by the theory, with no equity premium puzzle. In a macroeconomic model, the interest rate paid is an endogenous choice of the household.