Portfolio Choice and Asset Pricing With Nontraded Assets

Lars Svensson

No 2774, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines portfolio choice and asset pricing when some assets are nontraded, for instance when a country cannot trade claims to its output on world capital markets, when a government cannot trade claims to future tax revenues, or when an individual cannot trade claims to his future wages. The close relation between portfolio choice with and implicit pricing of nontraded assets is emphasized. A variant of Cox, Ingersoll and Ross's Fundamental Valuation Equation is derived and used to interpret the optimal portfolio. Explicit solutions are presented to the portfolio and pricing problem for some special cases, including when income from the nontraded assets is a diffusion process, not spanned by traded assets, and affected by a state variable.

Date: 1988-11
Note: ITI IFM
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Citations: View citations in EconPapers (6)

Published as Svensson, Lars E. O. and Ingrid M. Werner. "Nontraded Assets In Incomplete Markets: Pricing And Portfolio Choice," European Economic Review, 1993, v37(5), 1149-1168.

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Working Paper: PORTFOLIO CHOICE AND ASSET PRICING WITH NONTRADED ASSETS (1988)
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