A CAPM WITH TRADING CONSTRAINTS AND PRICE BUBBLES

Robert Jarrow ()

International Journal of Theoretical and Applied Finance (IJTAF), 2017, vol. 20, issue 08, 1-39

Abstract: This paper derives an equilibrium capital asset pricing model (CAPM) in a market with trading constraints and asset price bubbles. The asset price processes are general semimartingales including Markov jump-diffusion processes as special cases, and the trading constraints considered include short sale restrictions, borrowing constraints, and margin requirements, among others. We derive a generalized intertertemporal CAPM and consumption CAPM for these markets. The implications for empirical testing are that additional systematic risk factors will exist in a market with trading constraints and price bubbles as contrasted with an otherwise equivalent unconstrained market with no price bubbles.

Keywords: Trading constraints; price bubbles; short sales; margin requirements; intertemporal CAPM; consumption CAPM (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S0219024917500534

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