DP14257 Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing
|Author(s):||Bruno Biais, Johan Hombert, Pierre-Olivier Weill|
|Publication Date:||December 2019|
|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. Introducing these problems in an otherwise canonical general equilibrium model yields a rich set of implications. Security markets are endogenously segmented. There is a basis going always in the same direction: the price of any risky security is lower than that of the replicating portfolio of Arrow securities. Equilibrium expected returns are concave in consumption betas, in line with empirical findings. As the dispersion of consumption betas of the risky securities increases, incentive constraints are relaxed and the basis reduced. When hit by adverse shocks, relatively risk tolerant agents sell their safest securities.