Risk Economics and Multi-Agent CCAPM

Utility models to price risk assets have been used following the seminal contribution of Markowitz, Sharpe, Lintner and a legion of economist and financial engineers. Models such as CAPM (Capital Assets Pricing Model) are for example linear risk models, implying a quadratic utility function which is used profusely in the financial industry. Generalization to the CCAPM (The Consumption Capital Assets Pricing Model) has further extended the theoretical and practical usefulness of such models, as well as provide an apparent relationship (in some cases) with pricing models based on Arrow-Debreu state preference theory. In this chapter this economic framework is extended, in the sense that the CCAPM may account for some endogenous factors embedded in economic aggregates (such as aggregate consumption rather than just an individual’s consumer). Such an extension has not been subjected to an empirical analysis but provides a theoretical framework for assessing a number of additional factors that affect the pricing of risk. In particular, it provides an economic and financial framework to value and price assets in situations that depart from the complete market hypothesis such as debt, consumers wealth etc. Applications are considered in both this chapter and the next.