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Portfolio Choice And Asset Pricing With Nontraded Assets

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  • SVENSSON, L.E.O.

Abstract

This paper examines portfolio choice and asset pricing when some assets are nontraded, for instance when a country cannot trade claims to its output on world capital markets, when a government cannot trade claims to future tax revenues, or when an individual cannot trade claims to his future wages. The close relation between portfolio choice with and implicit pricing of nontraded assets is emphasized. A variant of Cox, Ingersoll and Ross's Fundamental Valuation Equation is derived and used to interpret the optimal portfolio. Explicit solutions are presented to the portfolio and pricing problem for some special cases, including when income from the nontraded assets is a diffusion process, not spanned by traded assets, and affected by a state variable.
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Suggested Citation

  • Svensson, L.E.O., 1988. "Portfolio Choice And Asset Pricing With Nontraded Assets," Papers 417, Stockholm - International Economic Studies.
    • Handle: RePEc:fth:stocin:417
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    2. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-534, June.
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    7. Duffie, Darrell & Jackson, Matthew O., 1990. "Optimal hedging and equilibrium in a dynamic futures market," Journal of Economic Dynamics and Control, Elsevier, vol. 14(1), pages 21-33, February.
    8. Bernard Dumas, "undated". "Pricing Physical Assets Internationally," Rodney L. White Center for Financial Research Working Papers 12-88, Wharton School Rodney L. White Center for Financial Research.
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    12. repec:bla:jfinan:v:43:y:1988:i:1:p:143-53 is not listed on IDEAS
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    Cited by:

    1. Hugo Benítez-Silva, 2003. "Labor Supply Flexibility and Portfolio Choice: An Empirical Analysis," Working Papers wp056, University of Michigan, Michigan Retirement Research Center.
    2. Pierpaolo Pattitoni & Marco Savioli, 2011. "Investment Choices: Indivisible non-Marketable Assets and Bounded Rationality," Working Paper series 07_11, Rimini Centre for Economic Analysis.
    3. Hans Andersson & Buddhavarapu Sailesh Ramamurtie & Bharat Ramaswami, 1995. "An intertemporal model of consumption and portfolio allocation," FRB Atlanta Working Paper 95-15, Federal Reserve Bank of Atlanta.
    4. Pattitoni, Pierpaolo & Savioli, Marco, 2011. "Investment choices: Indivisible non-marketable assets and suboptimal solutions," Economic Modelling, Elsevier, vol. 28(6), pages 2387-2394.
    5. Miguel Palacios, 2010. "Human Capital as an Asset Class: Implications from a General Equilibrium Model," Working Papers 2011-016, Human Capital and Economic Opportunity Working Group.
    6. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.

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    Keywords

    financial market ; pricing;

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