Market Organization and the Prices of Financial Assets*

Several empirical regularities in the prices of financial assets are at odds with the predictions of standard economic theory. I address these regularities and explore the extent to which they are resolved in the context of two markets organized in very different ways. The first setting is a neoclassical economy with incomplete markets and heterogeneous agents. Market incompleteness naturally arises because of the non-existence of markets in which consumers or households can co-insure idiosyncratic income shocks for obvious moral hazard reasons. The second setting is an overlapping generations economy with three generations in which the young generation is constrained from borrowing and investing in equities. The borrowing constraints naturally arise because human capital alone does not collateralize major loans in modern economies for reasons of moral hazard and adverse selection.