Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

62 Pages Posted: 6 Nov 2017 Last revised: 17 Jul 2022

See all articles by Bruno Biais

Bruno Biais

University of Toulouse 1 - Toulouse School of Economics (TSE)

Johan Hombert

HEC Paris - Finance Department

Pierre-Olivier Weill

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

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Date Written: November 2017

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 Trans-port 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.

Suggested Citation

Biais, Bruno and Hombert, Johan and Weill, Pierre-Olivier, Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing (November 2017). NBER Working Paper No. w23986, Available at SSRN: https://ssrn.com/abstract=3065798

Bruno Biais (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Johan Hombert

HEC Paris - Finance Department ( email )

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

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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