IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v111y2021i11p3575-3610.html

Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

Author

Listed:
  • Bruno Biais
  • Johan Hombert
  • Pierre-Olivier Weill

Abstract

Incentive problems make securities' payoffs imperfectly pledgeable, limiting agents' ability to issue liabilities. We analyze the equilibrium consequences of such endogenous incompleteness in a dynamic exchange economy. Because markets are endogenously incomplete, agents have different intertemporal marginal rates of substitution, so that they value assets differently. Consequently, agents hold different portfolios. This leads to endogenous markets segmentation, which we characterize with optimal transport methods. Moreover, there is a basis going always in the same direction: the price of a security is lower than that of replicating portfolios of long positions. Finally, equilibrium expected returns are concave in factor loadings.

Suggested Citation

  • Bruno Biais & Johan Hombert & Pierre-Olivier Weill, 2021. "Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing," American Economic Review, American Economic Association, vol. 111(11), pages 3575-3610, November.
    • Handle: RePEc:aea:aecrev:v:111:y:2021:i:11:p:3575-3610
    DOI: 10.1257/aer.20181707
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/aer.20181707
    Download Restriction: no
    File URL: https://doi.org/10.3886/E142421V1
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/aer.20181707.appx
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/aer.20181707.ds
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: https://libkey.io/10.1257/aer.20181707?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhiguo He & Paymon Khorrami & Zhaogang Song, 2022. "Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress," The Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4630-4673.
    2. Iraola, Miguel A. & Sepúlveda, Fabián & Torres-Martínez, Juan Pablo, 2019. "Financial segmentation and collateralized debt in infinite-horizon economies," Journal of Mathematical Economics, Elsevier, vol. 80(C), pages 56-69.
    3. Hugues Dastarac, 2021. "Strategic Trading, Welfare and Prices with Futures Contracts," Working papers 841, Banque de France.
    4. Nina Boyarchenko & Thomas M. Eisenbach & Pooja Gupta & Or Shachar & Peter Van Tassel, 2018. "Bank-Intermediated Arbitrage," Liberty Street Economics 20181018, Federal Reserve Bank of New York.
    5. Erwan Morellec & Boris Nikolov & Norman Schürhoff, 2018. "Agency Conflicts around the World," The Review of Financial Studies, Society for Financial Studies, vol. 31(11), pages 4232-4287.
    6. Paymon Khorrami & Alexander K. Zentefis, 2020. "Arbitrage and Beliefs," CESifo Working Paper Series 8490, CESifo.
    7. Allen, Franklin & Barbalau, Adelina, 2024. "Security design: A review," Journal of Financial Intermediation, Elsevier, vol. 60(C).
    8. Du, Wenxin & Hébert, Benjamin & Li, Wenhao, 2023. "Intermediary balance sheets and the treasury yield curve," Journal of Financial Economics, Elsevier, vol. 150(3).

    More about this item

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:111:y:2021:i:11:p:3575-3610. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.