Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

72 Pages Posted: 24 Oct 2017 Last revised: 29 Nov 2017

See all articles by Johan Hombert

Johan Hombert

HEC Paris - Finance Department

Bruno Biais

Centre for Economic Policy Research (CEPR)

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

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Date Written: October 24, 2017

Abstract

Incentive problems make assets imperfectly pledgeable. Introducing these problems in an otherwise canonical general equilibrium model yields a rich set of implications. Asset markets are endogenously segmented. There is a basis going always in the same direction, as the price of any risky asset is lower than that of the replicating portfolio of Arrow securities. Equilibrium expected returns are concave in consumption betas, in line with empirical findings. As the dispersion of consumption betas of the risky assets increases, incentive constraints are relaxed and the basis reduced. When hit by adverse shocks, relatively risk tolerant agents sell the safest assets they hold.

Suggested Citation

Hombert, Johan and Biais, Bruno and Weill, Pierre-Olivier, Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing (October 24, 2017). HEC Paris Research Paper No. FIN-2017-1236. Available at SSRN: https://ssrn.com/abstract=3057923 or http://dx.doi.org/10.2139/ssrn.3057923

Johan Hombert (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Bruno Biais

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Pierre-Olivier Weill

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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