DP14257 Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

Author(s):	Bruno Biais, Johan Hombert, Pierre-Olivier Weill
Publication Date:	December 2019
Date Revised:	November 2020
Keyword(s):	Asset Pricing, Collateral constraints, Endogenously Incomplete, General Equilibrium
JEL(s):
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.