Can Market Incompleteness Resolve Asset Pricing Puzzles?

Authors

  • Mark C. Freeman

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    • The author is from the School of Business and Economics, University of Exeter. He is grateful for the constructive suggestions made by participants at seminars given at Northwestern University, UC Irvine, Oxford University and the University of Warwick. Particular thanks are given to Peter Corvi, Debbie Lucas, John Heaton, Richard Harris and Elizabeth Whalley. All remaining errors are the author's own. (Paper received December 2001, accepted June 2003)


Mark C. Freeman, School of Business and Economics, University of Exeter, Exeter EX4 4PU, UK.
e-mail: Mark.C.Freeman@exeter.ac.uk

Abstract

Abstract:  This paper shows that the presence of persistent uninsurable risk concentrated in economic depressions has the potential to resolve two well-known asset pricing puzzles. It is also shown that the presence of such risk in more normal economic expansions and recessions is likely to be much less relevant in determining equilibrium asset prices.

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