Limited asset market participation and the consumption‐real exchange rate anomaly

Model Uncertainty, Limited Market Participation, and Asset Prices

We demonstrate that limited market participation can arise endogenously in the presence of model uncertainty. Our model generates novel predictions on the relation between limited market participation, the equity premium, and the diversification discount. When the dispersion in investors’ model uncertainty is small, full market participation prevails in equilibrium. In this case, the equity pre...

Limited Market Participation and Asset Prices in the Presence of Earnings Management

We examine the role of earnings management in explaining the properties of asset prices and stock market participation. We demonstrate that investors’ uncertainty about the extent of manipulation can cause excess movements in stock price relative to fluctuations in output. When faced with information asymmetry about fundamentals in the presence of earnings management, investors demand a higher ...

Limited Stock Market Participation and Asset Prices in a Dynamic Economy

This paper presents a consumptiun-ba,setl model that explains Ihe equity premitim puzzle through two channels, Hirst, because of borrowing constraints, the sharehokler cannt)t completely diversify his income risk ami requires a sizable risk premium on .stocks. Second, because of limited stock market participation, the precautionary saving demand lowers the risk-free rate but not stock reiurn an...

Exchange rate volatility and its effect on stock market volatility

This paper investigates empirically the effect of volatility of the exchange rate of the U.S. dollar vis-à-vis the euro on U.S. stock market volatility while controlling for a number of drivers of stock return volatility. Using a GARCH(1, 1) model and using weekly data covering the period from the week of January 1, 1999 through the week of January 25, 2010, it is found that the 9/11 terrorist ...

Endogenous asset market segmentation : interest rate dynamics