Lecture11 - Lecture 11 Asset Pricing ECN/APEC 7240 XI 2 Assets and Contingent Claims • A claim on consumption at time t conditional on history s

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Lecture 11 Asset Pricing ECN/APEC 7240 XI - 2 Assets and Contingent Claims • A claim on consumption at time t conditional on history s t is known as a contingent claim . • An asset can be viewed as a bundle of contingent claims. • If markets are complete, the price of all these contingent claims is already determined. • The price of the asset is simply the cost of the bundle. ECN/APEC 7240 XI - 3 Asset Pricing Formula • Suppose an asset pays dividend d t ( s t ) at time t and history s t . • The price of the bundle at t = 0 is • The asset must have the same price or there will be an arbitrage opportunity . . ) ( ) ( ) ( 1 ∑ ∑ ∞ = ∈ + = t S s t t t t t t s d s q s p ECN/APEC 7240 XI - 4 Zero-Coupon Bonds • Consider a riskless bond with maturity t . • It pays one unit of consumption in all states of the world at period t . . ) ( ) ( 1 ∑ + ∈ = t t S s t t s q s p ECN/APEC 7240 XI - 5 Riskless Consol • A consol is an asset that risklessly pays one unit of consumption in every period forever.unit of consumption in every period forever....
View Full Document

This note was uploaded on 01/09/2011 for the course ECON 7140 taught by Professor Kutler during the Spring '10 term at Utah Valley University.

Page1 / 11

Lecture11 - Lecture 11 Asset Pricing ECN/APEC 7240 XI 2 Assets and Contingent Claims • A claim on consumption at time t conditional on history s

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online