A Financial CCAPM and Economic Inequalities

27 Pages Posted: 25 May 2014

See all articles by Charles S. Tapiero

Charles S. Tapiero

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering

Date Written: May 24, 2014

Abstract

This paper considers a wealth heterogeneous multi-agent financial pricing CCAPM model and the effects of economic inequalities on agents consumption pricing. It is based on the following observations: (a) A distinction between what agents are willing to pay for consumption and what they actually pay. The former is a function of a number of factors including the agent’s wealth and risk preferences and the latter is a function of all other agents’ aggregate consumption or equivalently, their wealth committed to consumption. (b) Unlike traditional pricing models that define a representative agent underlying the pricing model, this paper assumes that each agent is “Cournot-gaming” a market defined by all other agents. This results in a decomposition of an n-agents game into n games of two agents, one a specific agent and the other a synthetic agent (a proxy for all other agents), on the basis of which an equilibrium consumption price solutions is defined.

The paper’s essential results are two-fold. First, a martingale pricing model is defined for each individual agent expressing the consumer willingness to pay (his utility price) and the market price — the price that all agents pay for consumption. In this sense, price is unique defined by each agent’s “Cournot games”. Agents consumption are then adjusted accordingly to meet the market price. Second, the pricing model defined is shown to account agents wealth distribution pointing out that all agents valuations are a function of their and others’ wealth, the information they have about each other and other factors which are discussed in the text. When an agent has no wealth or cannot affect the market price of consumption, then this pricing model is reduced to the standard CCAPM model while any agent with an appreciable wealth compared to other agents, is shown to value returns (and thus future consumption) less than wealth-poor agents. As a result, this paper will argue that even in a financial market with an infinite number of agents, if there are some agents that are large enough to affect the market price by their decisions, such agents have an arbitrage advantage over the poorer agents. The financial CCAPM multi-agent pricing model has a number of implications, some of which are considered in this paper. Finally, some simple examples are considered to highlight the applicability of this paper to specific financial issues.

Suggested Citation

Tapiero, Charles S., A Financial CCAPM and Economic Inequalities (May 24, 2014). Available at SSRN: https://ssrn.com/abstract=2441527 or http://dx.doi.org/10.2139/ssrn.2441527

Charles S. Tapiero (Contact Author)

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

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