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Perron–Frobenius theory recovers more than you might think: The example of limited participation

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  • Le Grand, François

Abstract

In their seminal article, Hansen and Scheinkman (2009) proved that Perron–Frobenius theory helps to recover a probability measure that can be used to price long-term claims. In this paper, we show that the recovered probability also contains information about market structure. More precisely, we provide an example in which Perron–Frobenius theory can be used to measure the degree of limited market participation.

Suggested Citation

  • Le Grand, François, 2019. "Perron–Frobenius theory recovers more than you might think: The example of limited participation," Economics Letters, Elsevier, vol. 174(C), pages 186-188.
    • Handle: RePEc:eee:ecolet:v:174:y:2019:i:c:p:186-188
    DOI: 10.1016/j.econlet.2018.11.006
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    References listed on IDEAS

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    1. Challe, Edouard & Le Grand, François & Ragot, Xavier, 2013. "Incomplete markets, liquidation risk, and the term structure of interest rates," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2483-2519.
    2. Lars Peter Hansen & José A. Scheinkman, 2009. "Long-Term Risk: An Operator Approach," Econometrica, Econometric Society, vol. 77(1), pages 177-234, January.
    3. Steve Ross, 2015. "The Recovery Theorem," Journal of Finance, American Finance Association, vol. 70(2), pages 615-648, April.
    4. Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November.
    5. Krusell, Per & Mukoyama, Toshihiko & Smith Jr., Anthony A., 2011. "Asset prices in a Huggett economy," Journal of Economic Theory, Elsevier, vol. 146(3), pages 812-844, May.
    6. repec:hal:pseose:halshs-00944920 is not listed on IDEAS
    7. Jaroslav Borovička & Lars Peter Hansen & José A. Scheinkman, 2016. "Misspecified Recovery," Journal of Finance, American Finance Association, vol. 71(6), pages 2493-2544, December.
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