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Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints

Jérôme Detemple^1,2; Shashidhar Murthy^3,4

¹ Center for Interuniversity Research and Analysis on Organizations · ² McGill University · ³ Rutgers, The State University of New Jersey · ⁴ Rutgers Sexual and Reproductive Health and Rights

We examine intertemporal asset pricing when short sales are constrained in proportion to the value of an investor’s portfolio. All assets’ prices exceed every investor’s marginal utility of consumption-based valuation of the associated dividends if every investor finds himself constrained in some asset in some state; we exhibit such an equilibrium. An asset’s price decomposes into three (investor-specific) components: the consumption value of its dividends, a speculative value premium, and a collateral value premium. The validity of the no-arbitrage pricing approach is shown to depend critically on the difference between real securities and their synthetic counterparts.

DOI

10.1093/rfs/10.4.1133

Volume

10 (4)

Pages

1133-1174

Language

en

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