DP14257 Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing
|Author(s):||Bruno Biais, Johan Hombert, Pierre-Olivier Weill|
|Publication Date:||December 2019|
|Date Revised:||September 2021|
|Keyword(s):||Asset Pricing, Collateral constraints, Endogenously Incomplete, General Equilibrium|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14257|
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.