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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 ZeroCoupon 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....
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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.
 Spring '10
 Kutler
 Microeconomics

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