Risk-neutral economy and zero price of risk |
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Authors: | Oldrich Alfons Vasicek |
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Institution: | 1. 1133 Estates Drive, Lafayette, CA, 94549, USA
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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. |
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