Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

Pierre-Olivier Weill, Bruno Biais and Johan Hombert

No 14257, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: General equilibrium; Asset pricing; Collateral constraints; Endogenously incomplete (search for similar items in EconPapers)
Date: 2019-12
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing (2021)
Working Paper: Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing (2017)
Working Paper: Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing (2017)
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