Post by Sapphire Capital on Aug 21, 2008 22:36:44 GMT 4
Choice and Allocation of a Risky Asset through Markets and Prices
Leonard J. Mirman
University of Virginia - Department of Economics
Marc Santugini
HEC Montreal, Institute of Applied Economics
July 24, 2008
Abstract:
We study the choice and allocation of a risky asset through markets and prices. This is done by an entrepreneur who faces uncertainty in the real sector. The entrepreneur has access to the financial sector, and may share risk with the investors by issuing shares of a risky asset. Here, the risky asset is equivalent to the distribution of the real profit derived from the choice of output, which integrates the real and financial sectors. The entrepreneur decides the level of output as well as the level of ownership.
We present two sets of results. First, there exists a unique equilibrium in which risk is always shared among the entrepreneur and investors. Moreover, financial access enables the entrepreneur to undertake a riskier project without bearing as much risk. Specifically, the entrepreneur's participation in the financial market affects the distribution of real profit, i.e., the choice of the risky asset, by increasing the level of output, which increases the variance of real profit. At the same time, risk sharing decreases the variance of the entrepreneur's share of real profit. Second, the effects of risk in the economy and agents' risk aversions on the equilibrium price of the risky asset, as well as the firm's optimal policies is studied.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1174722_code415972.pdf?abstractid=1174722&mirid=3
Leonard J. Mirman
University of Virginia - Department of Economics
Marc Santugini
HEC Montreal, Institute of Applied Economics
July 24, 2008
Abstract:
We study the choice and allocation of a risky asset through markets and prices. This is done by an entrepreneur who faces uncertainty in the real sector. The entrepreneur has access to the financial sector, and may share risk with the investors by issuing shares of a risky asset. Here, the risky asset is equivalent to the distribution of the real profit derived from the choice of output, which integrates the real and financial sectors. The entrepreneur decides the level of output as well as the level of ownership.
We present two sets of results. First, there exists a unique equilibrium in which risk is always shared among the entrepreneur and investors. Moreover, financial access enables the entrepreneur to undertake a riskier project without bearing as much risk. Specifically, the entrepreneur's participation in the financial market affects the distribution of real profit, i.e., the choice of the risky asset, by increasing the level of output, which increases the variance of real profit. At the same time, risk sharing decreases the variance of the entrepreneur's share of real profit. Second, the effects of risk in the economy and agents' risk aversions on the equilibrium price of the risky asset, as well as the firm's optimal policies is studied.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1174722_code415972.pdf?abstractid=1174722&mirid=3