Equilibrium asset prices and no-arbitrage with portfolio constraints |
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| Authors: | Detemple J; Murthy S |
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| Institution: | 1 McGill University and CIRANO
z Corresponding author at: Faculty of Management, Rutgers University, 81 New Street, Newark, NJ 07102, USA |
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| Abstract: | We examine intertemporal asset pricing when short sales areconstrained in proportion to the value of an investor's portfolio.All assets' prices exceed every investor's marginal utilityof consumption-based valuation of the associated dividends ifevery investor finds himself constrained in some asset in somestate; we exhibit such an equilibrium. An asset's price decomposesinto three (investor-specific) components: the consumption valueof its dividends, a speculative value premium, and a collateralvalue premium. The validity of the no-arbitrage pricing approachis shown to depend critically on the difference between realsecurities and their synthetic counterparts. |
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