A Computational Algorithm for Equilibrium Asset Pricing Under Heterogeneous Information and Short-Sale Constraints

Jun Tong (), Jian-Qiang Hu and Jiaqiao Hu ()
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Jun Tong: School of Management, Shanghai University, Shanghai 200444, P. R. China
Jian-Qiang Hu: Department of Management Science, Fudan University, Shanghai 200433, P. R. China
Jiaqiao Hu: Department of Applied Mathematics and Statistics, State University of New York, Stony Brook, NY 11794, USA

Asia-Pacific Journal of Operational Research (APJOR), 2017, vol. 34, issue 05, 1-16

Abstract: We propose an efficient algorithm for computing the equilibrium of a capital asset pricing model with heterogeneous investors and short-sale constraints. We show that the equilibrium prices of the risky assets in the model are proportional to the Lagrangian multipliers of an equivalent dual formulation of the problem. Based on this observation, we derive sufficient conditions to guarantee the existence and uniqueness of equilibrium and prove the convergence of the algorithm. Numerical examples are also provided to illustrate the algorithm.

Keywords: Equilibrium pricing; aggregate utility function; convex optimization; tâtonnement (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S0217595917500257

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