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Equilibrium With Excessive Holdings Constraint: An Application To Dc Pension Plans

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  • ISSOUF SOUMARÉ

    (Laval University, Faculty of Business Administration, Quebec, QC., Canada G1K 7P4, Canada)

Abstract

In this paper, I study the equilibrium implications when some investors in the economy overweight a subset of stocks within their portfolio. I find that the excess returns for the overweighted stocks are lower, all else being equal. This has strong testable implications for stock returns. In the special case of logarithmic preferences, the riskfree rate increases and the market price of risk for the overweighted stock decreases, which create extra incentive for unconstrained agents to exit the stock market and hold bonds, hence clearing the market. The changes of stocks' volatilities are ambiguous. Finally, I provide an accurate quantification for agents' welfare. I also discuss the implications of my model in the context of defined contribution pension plans where workers hold large shares of their employer.

Suggested Citation

  • Issouf Soumaré, 2007. "Equilibrium With Excessive Holdings Constraint: An Application To Dc Pension Plans," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(07), pages 1159-1190.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:07:n:s0219024907004597
    DOI: 10.1142/S0219024907004597
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    References listed on IDEAS

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    1. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
    2. Leonid Kogan & Raman Uppal, "undated". "Risk Aversion and Optimal Portfolio Policies in Partial and General Equilibrium Economies," Rodney L. White Center for Financial Research Working Papers 13-00, Wharton School Rodney L. White Center for Financial Research.
    3. Nellie Liang & Scott Weisbenner, 2002. "Investor Behavior and the Purchase of Company Stock in 401(k) Plans - The Importance of Plan Design," NBER Working Papers 9131, National Bureau of Economic Research, Inc.
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