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Dynamic Consumption-Portfolio Choice and Asset Pricing with Non-Price-Taking Agents (Revised: 7-95)


  • Süleyman Basak


This paper develops a continuous-time pure exchange model to theoretically study the dynamic consumption-portfolio problem of an agent who acts as a non-price-taker, and to analyze the implications of his behavior on the security prices and their dynamics. The non-price-taking behavior is modeled by allowing the non-price-taker’s consumption stream to affect Arrow-Debreu prices. This allows us to employ martingale methods in a natural way, making the analysis highly tractable. We define non-price-taking equilibrium in an economy of N price-takers and one non-price-taker, and show the existence and uniqueness of this equilibrium under common assumptions about the agents’ utility functions and dividend streams. Solving for the equilibrium consumption allocations reveals the existence of another driving factor apart from the aggregate consumption stream, the endowment stream of the non-price-taker, which leads to modified formulae for the interest rate and the consumption CAPM. We characterize the equilibrium consumption-portfolio allocations, and the Arrow-Debreu and security prices and their dynamics, i.e., the interest rate, market prices of risk, asset price volatility and risk premium. A variety of comparisons of equilibria between a price-taking and a non-price-taking economy are carried out, in some cases for general utility functions and in some cases for CARA utility of all agents. Intuition for the results is offered.

Suggested Citation

  • Süleyman Basak, "undated". "Dynamic Consumption-Portfolio Choice and Asset Pricing with Non-Price-Taking Agents (Revised: 7-95)," Rodney L. White Center for Financial Research Working Papers 8-94, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:8-94

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    References listed on IDEAS

    1. Richard, Scott F. & Sundaresan, M., 1981. "A continuous time equilibrium model of forward prices and futures prices in a multigood economy," Journal of Financial Economics, Elsevier, vol. 9(4), pages 347-371, December.
    2. Robert A. JARROW & George S. OLDFIELD, 2008. "Forward Contracts And Futures Contracts," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 11, pages 237-246 World Scientific Publishing Co. Pte. Ltd..
    3. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    4. Benninga, Simon & Protopapadakis, Aris, 1994. "Forward and Futures Prices with Markovian Interest-Rate Processes," The Journal of Business, University of Chicago Press, vol. 67(3), pages 401-421, July.
    5. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    6. Benninga, Simon & Protopapadakis, Aris, 1983. "Real and Nominal Interest Rates under Uncertainty: The Fisher Theorem and the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 856-867, October.
    7. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
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