Dynamic Consumption-Portfolio Choice and Asset Pricing with Non-Price-Taking Agents (Revision of 8-94) (Reprint 062)

Suleyman Basak

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: This paper develops a continuous-time pure-exchange model to study the dynamic consumption-portfolio problem of an agent who acts as a non-price-taker, and to analyze the implications of his behavior on equilibrium security price dynamics. The non-price-taker is modeled as a price leader in all markets; his price impact is then recast as an effect of consumption on the Arrow-Debreu prices, allowing the use of martingale methods in a tractable way. Besides the aggregate consumption, the endowment stream of the non-price-taker appears as an additional factor in driving the equilibrium allocations and prices. Comparisons of equilibria between a price-taking and a non-price-taking economy are carried out.

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