Asset Pricing Puzzles Explained By Incomplete Brownian Equilibria

The authors examine a class of Brownian based models which produce tractable incomplete equilibria. The models are based on finitely many investors with heterogeneous exponential utilities over intermediate consumption who receives partially unspanned income. The investors can trade continuously on a finite time interval in a money market account as well as a risky security. Besides establishing the existence of equilibrium, the main result shows that the resulting equilibrium can display a lower risk-free rate and a higher risk premium relative to the usual Pareto efficient equilibrium in complete markets.