### Abstract

We examine a class of Brownian based models which

produce tractable incomplete equilibria. The models are based

on finitely many investors with heterogeneous exponential utilities

over intermediate consumption who receive partially unspanned

income. The investors can trade continuously on a

finite time interval in a money market account as well as a

risky security. Besides establishing the existence of an equilibrium,

our main result shows that the resulting equilibrium

can display a lower risk-free rate and a higher risk premium

relative to the usual Pareto efficient equilibrium in complete

markets. Consequently, our model can simultaneously help

explaining the risk-free rate and equity premium puzzles.

produce tractable incomplete equilibria. The models are based

on finitely many investors with heterogeneous exponential utilities

over intermediate consumption who receive partially unspanned

income. The investors can trade continuously on a

finite time interval in a money market account as well as a

risky security. Besides establishing the existence of an equilibrium,

our main result shows that the resulting equilibrium

can display a lower risk-free rate and a higher risk premium

relative to the usual Pareto efficient equilibrium in complete

markets. Consequently, our model can simultaneously help

explaining the risk-free rate and equity premium puzzles.

Original language | English |
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Place of Publication | www |

Publisher | ArXiv |

Number of pages | 30 |

Publication status | Published - 2010 |

Externally published | Yes |

## Cite this

Christensen, P. O., & Larsen, K. (2010).

*Asset pricing puzzles explained by incomplete Brownian equilibria*. ArXiv. http://EconPapers.repec.org/RePEc:arx:papers:1009.3479