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Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints

Author

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  • Jérôme 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. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jérôme Detemple & Shashidhar Murthy, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," CIRANO Working Papers 97s-12, CIRANO.
    • Handle: RePEc:cir:cirwor:97s-12
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    File URL: https://cirano.qc.ca/files/publications/97s-12.pdf
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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;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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