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- Title
Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing.
- Authors
Biais, Bruno; Hombert, Johan; Weill, Pierre-Olivier
- 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 transport 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. (JEL D51, D52, G11, G12)
- Subjects
RISK sharing; PRICES of securities; ASSETS (Accounting); MARKET segmentation; EQUILIBRIUM
- Publication
American Economic Review, 2021, Vol 111, Issue 11, p3575
- ISSN
0002-8282
- Publication type
Article
- DOI
10.1257/aer.20181707