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Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints

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Author Info
Jérôme B. Detemple ()
Shashidhar Murthy
Abstract

We examine intertemporal asset pricing when short sales are constrained in proportion to the value of an investor's portfolio. All assets' prices exceed every investor's marginal utility of consumption-based valuation of the associated dividends if every investor finds himself constrained in some asset in some state; we exhibit such an equilibrium. An asset's price decomposes into three (investor-specific) components: the consumption-value of its dividends, a speculative-value premium, and a collateral-value premium. The validity of the no-arbitrage pricing approach is shown to depend critically on the difference between real securities and their synthetic counterparts.

Cet article examine l'évaluation intertemporelle des titres financiers lorsque les ventes à découvert sont limitées en proportion à la valeur du portefeuille de l'investisseur. Le prix de tout actif dépasse, pour tout investisseur, la valorisation de ses dividendes basée sur l'utilité marginale de consommation individuelle, lorsque chaque investisseur se trouve contraint dasn un actif quelconque dans un état quelconque; nous démontrons l'existence d'un tel équilibre. Le prix d'un actif a trois composantes : la valeur de consommation de ses dividendes, une prime de valeur spéculative, et une prime de valeu de collatéral. La validité de l'approche de validation fondée sur l'absence d'arbitrage dépend de manière critique de la différence entre un actif réel et sa contrepartie synthétique.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 97s-12.

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Date of creation: 01 Mar 1997
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Handle: RePEc:cir:cirwor:97s-12

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Keywords: Equilibrium asset prices; no-arbitrage; frictions; consumptiom-value; speculative-value; collateral-value; derivative markets; Prix d'équilibre des titres; absence d'arbitrage; frictions; valeur de consommation; valeur spéculative; valeur de collatéral; titres dérivés;

Find related papers by JEL classification:
C60 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - General
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  4. Eli Ofek & Matthew Richardson & Robert F. Whitelaw, 2003. "Limited Arbitrage and Short Sales Restrictions: Evidence from the Options Markets," NBER Working Papers 9423, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Frank Milne & Xing Jin, 2006. "Taxation and Transaction Costs in a General Equilibrium Asset Economy," Working Papers 1111, Queen's University, Department of Economics. [Downloadable!]
  6. Suleyman Basak & David Cass & Juan Manuel Licari & Anna Pavlova, 2006. "Multiplicity in General Financial Equilibrium with Portfolio Constraints, Second Version," PIER Working Paper Archive 06-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 17 Jul 2006. [Downloadable!]
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  8. Frank Milne & Edwin Neave, 2003. "A General Equilibrium Financial Asset Economy with Transaction Costs and Trading Constraints," Working Papers 1082, Queen's University, Department of Economics. [Downloadable!]
  9. Basak, Suleyman & Cass, David & Licari, Juan Manuel & Pavlova, Anna, 2006. "Multiplicity in General Financial Equilibrium with Portfolio Constraints," CEPR Discussion Papers 5804, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Basak, Suleyman, 2004. "Asset Prices with Heterogenous Beliefs," CEPR Discussion Papers 4256, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Suleyman Basak & David Cass & Juan Manuel Licari & Anna Pavlova, 2006. "Multiplicity and Sunspots in General Financial Equilibrium with Portfolio Constraints," PIER Working Paper Archive 06-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
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  13. Pavlova, Anna & Rigobon, Roberto, 2005. "Wealth Transfers, Contagion and Portfolio Constraints," CEPR Discussion Papers 5117, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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