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# lecture11 - Lecture 11 Asset Pricing Assets and Contingent...

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Lecture 11 Asset Pricing

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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 . . ) ( ) ( ) ( 0 0 0 0 0 1 ∑ ∑ = + = t S s t t t t t t s d s q s p

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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 0 0 0 0 + = 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.

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