Shadow costs of incomplete information and short sales in the valuation of the firm and its assets

Mondher Bellalah

The North American Journal of Economics and Finance, 2016, vol. 37, issue C, 406-419

Abstract: This paper presents a simple framework for the valuation of compound options within shadow costs of incomplete information and short sales. The shadow cost includes two components. The first component is the product of pure information cost due to imperfect knowledge and heterogeneous expectations. The second component represents the additional cost caused by the short-selling constraint. Information costs are linked to Merton's (1987. Journal of Finance 42, 510) model of capital market equilibrium with incomplete information, CAPMI. This model is extended by Wu et al. (1996. Review of Quantitative Finance and Accounting, 7, 136) who propose an incomplete-information capital market equilibrium with heterogeneous expectations and short sale restrictions, GCAPM. This model is used in our paper to provide for the first time in the literature analytic solutions for derivatives in the presence of both shadow costs of incomplete information and short sales.

Keywords: Valuation of the firm; Options; Arbitrage; Pricing; Information costs; Short sales costs (search for similar items in EconPapers)
JEL-codes: G3 G31 G32 G33 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:37:y:2016:i:c:p:406-419

DOI: 10.1016/j.najef.2016.02.001

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