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Title: Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

Author(s): Bruno Biais, Johan Hombert and Pierre-Olivier Weill

Publication Date: December 2019

Keyword(s): Asset Pricing, Collateral constraints, Endogenously Incomplete and General Equilibrium

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Biais, B, Hombert, J and Weill, P. 2019. 'Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14257