Group Risk Management UniCredit Group

This work presents an asset pricing model that under rational expectation equilibrium perspective shows how, depending on risk aversion and noise volatil-ity, a risky-asset has one equilibrium price that differs in term of efficiency: an informational efficient one (similar to Campbell and Kyle (1993)), and another one where price diverges from its informational efficient level. The former Pareto dominates (is dominated by) the latter in presence of low (high) market risk per-ception. The estimates of the model using S&P 500 Index support the theoretical findings, and the estimated inefficient equilibrium price captures the higher risk premium and higher volatility observed during the Dot.com bubble 1995–2000