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Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

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  • 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 Trans-port 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, 2017. "Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing," NBER Working Papers 23986, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23986
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    References listed on IDEAS

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    1. S. Rao Aiyagari & Mark Gertler, 1999. ""Overreaction" of Asset Prices in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 3-35, January.
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    5. Venky Venkateswaran & Randall Wright, 2014. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 227-270.
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    Cited by:

    1. Paymon Khorrami & Alexander K. Zentefis, 2020. "Arbitrage and Beliefs," CESifo Working Paper Series 8490, CESifo.
    2. Erwan Morellec & Boris Nikolov & Norman Schürhoff, 2018. "Agency Conflicts around the World," Review of Financial Studies, Society for Financial Studies, vol. 31(11), pages 4232-4287.
    3. Zhiguo He & Paymon Khorrami & Zhaogang Song, 2022. "Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress," Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4630-4673.
    4. Nina Boyarchenko & Thomas M. Eisenbach & Pooja Gupta & Or Shachar & Peter Van Tassel, 2018. "Bank-intermediated arbitrage," Staff Reports 858, Federal Reserve Bank of New York.
    5. Hugues Dastarac, 2021. "Strategic Trading, Welfare and Prices with Futures Contracts," Working papers 841, Banque de France.
    6. 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.

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    More about this item

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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