Abstract
The paper investigates the equilibrium in an economy in which all participants are indifferent to risk. The mechanism of asset and derivative pricing in such economy is identified. It is shown that no economy in equilibrium with stochastic interest rates can be simultaneously risk-neutral and have zero market price of risk. On the other hand, there exist equilibrium economies with risk-averse participants and zero prices of risk.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Cox, J.C., Ingersoll Jr, J.E., Ross, S.A.: A re-examination of traditional hypotheses about the term structure of interest rates. J. Finance 36(4), 769–799 (1981)
Cox, J.C., Ingersoll Jr, J.E., Ross, S.A.: An intertemporal general equilibrium model of asset prices. Econometrica 53, 363–384 (1985)
Vasicek, O.A.: The economics of interest rates. J. Financial Econ. 76, 293–307 (2005)
Vasicek, O.A.: General equilibrium with heterogeneous participants and discrete consumption times. J. Financial Econ. 108, 608–614 (2013)
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Vasicek, O.A. Risk-neutral economy and zero price of risk. Math Finan Econ 8, 229–239 (2014). https://doi.org/10.1007/s11579-013-0105-x
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11579-013-0105-x
Keywords
- Risk-neutrality
- Market price of risk
- General equilibrium
- Exchange and production economies
- Determination of interest rates
- Term structure of interest rates